Question

Available-for-Sale Securities

Instructions

Chart of Accounts

General Journal

Analysis

Next Level

Instructions

At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value):

Security	Cost	1/1/18 Fair Value
A	$35,000	$44,000
B	53,000	50,000
Totals	$88,000	$94,000

During 2018, the following transactions occurred:

May 3	Purchased C debt securities at their par value for $50,000.
July 1	Sold all of the A securities for $44,000 plus interest of $1,000.
Dec. 31	Received interest of $1,000 on the B and C securities. Additionally the following information was available:

Security	12/31/18 Fair Value
B	$58,000
C	53,000

Required:

1.	Prepare journal entries to record the preceding information.
2.	What is the balance in the Unrealized Holding Gain/Loss account on December 31, 2018?
3.	Next Level What justification does the FASB give for its treatment of unrealized holding gains and losses for available-for-sale securities?

Chart of Accounts

CHART OF ACCOUNTS
Ace Company
General Ledger
ASSETS 111 Cash 114 Investment in Available-for-Sale Securities 119 Allowance for Change in Fair Value of Investment 121 Accounts Receivable 141 Inventory 151 Supplies 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 221 Notes Payable 224 Interest Payable 231 Salaries Payable EQUITY 311 Common Stock 331 Retained Earnings 391 Unrealized Holding Gain/Loss: Available-for-Sale Securities	REVENUE 411 Sales Revenue 431 Interest Income 435 Gain on Sale of Available-for-Sale Securities EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 513 Delivery Expense 515 Supplies Expense 521 Advertising Expense 523 Salaries Expense 531 Bad debt Expense 539 Miscellaneous Expenses 540 Interest Expense

General Journal

Prepare journal entries to record the 2018 transactions. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
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Analysis

What is the balance in the Unrealized Holding Gain/Loss account on December 31, 2018?

Next Level

What justification does the FASB give for its treatment of unrealized holding gains and losses for available-for-sale securities?

FASB requires unrealized holding gains and losses for available-for-sale securities to be reported as a component of other comprehensive income because:

I	Reporting unrealized holding gains and losses in income for available-for-sale securities would create unnecessary volatility in a company's reported net income.
II	The securities are actively managed making the inclusion of gains and losses irrelevant.

Answer 1

1. Journal entries to record the information provided:

Journal Entries Description Date Debit ($) Credit ($) 50,000 May-03 Investment in Available-for-Sale Securities Cash (Being Debt Security C Purchased) 50,000 45,000 Jul-01 Cash Investment in Available-for-Sale Securities Gain on Sale of Available-fot-Sale Securities Interest Income (Being Security A sold and earned gain plus interest) 35,000 9,000 1,000 9,000 Jul-01 Unrealized Holding Gain/ Loss - OCI Allowance for Change in Fair Value of Investment (Being recorded gain amount adjusted) 9,000 1,000 Dec-31 Cash Interest Income (Being Interest received on B and C debt securities) 1,000 11,000 Dec-31 Allowance for Change in Fair Value of Investment (8,000 + 3,000) Unrealized Holding Gain/ Loss - OCI (Being fair value adjusted) 11,000

2. Balance in the Unrealized Holding Gain/Loss account on December 31, 2018:

Particulars	Amount ($)
Beginning Balance of Security B	-3,000
Add: Fair Value Adjustment as on 31/12/2018
Unrealized Gain of Security B (58,000 – 50,000)	8,000
Unrealized Gain of Security C (53,000 – 50,000)	3,000
Unrealized Gain Account Balance as on 31/12/2018	8,000

3. FASB give for its treatment of unrealized holding gains and losses for available-for-sale securities the following justification

The justification given regarding treatment of unrealized holding gains/losses available for sale securities is that when the debt securities which are held for sale in the near future are classified as held for sale securities and thus reported at fair value. The unrealized gains will not be recorded as realized until and unless the securities are sold and thereafter the cash is realized for the same.