Detailed Answer
(b) An election can be made to use the fair value option
when financial assets cease to qualify for fair value treatment due
to specialized accounting rules. On June 30, year 2, the trading
securities were reclassified to the held-to-maturity category, and
an election was made to report them at fair value. On June 30,
year 2, the held-to-maturity securities were valued at $530,000,
and Jill would recognize a loss of $45,000 ($575,000 –
$530,000). At December 31, year 2, the securities declined in
value an additional $40,000. Therefore, the total loss recognized
in year 2 was $85,000 ($45,000 + $40,000). Answer (a) is incorrect
because the entire amount of loss in fair value should be
recognized in year 2. Answer (c) is incorrect because the loss
from January 1, year 1 to December 31, year 1, would have been
recognized in year 1 because it was classified as a trading security.
Answer (d) is incorrect because if the fair value option is elected,
unrealized gains and losses are recognized in the current year’s
earnings.