Question

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	1/1/2018 Fair Value
A	$20,000	$25,000
B	30,000	29,000
Totals	$50,000	$54,000

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 $25,000 plus interest of $1,000.
Dec. 31	Received interest of $7,600 on the B and C securities. Additionally the following information was available:

Security	12/31/18 Fair Value
B	$29,000
C	52,500

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?

Answer 1

1.       2018

May        3    Investment in Available-for-Sale

Securities                                                        50,000

Cash                                                                  50,000

July     16        Cash                                                25,000

Investment in Available-for-Sale

Securities                                                                            20,000

Gain on Sale of Available-for-Sale

Securities ($25,000 - $20,000)                                             5,000

16    Unrealized Increase/Decrease in

Value of Available-for-Sale

Securities ($25,000 - $20,000)                         5,000

Allowance for Change in Value

of Investment                                                                       5,000

Dec.        31    Cash                                                       7,600

Dividend Revenue                                                                           7,600

31    Allowance for Change in Value

                 of Investment                                                   5,000*

Unrealized Increase/Decrease in

                      Value of Available-for-Sale

                      Securities                                                                              5,000

                                          Cumulative

12/31/10         Change in

*Security                                                                             Cost           Fair Value        Fair Value

B Company common stock       $30,000                          $29,000          $1,000

C Company common stock       50,000                            52,500            2,500

Totals                                                                      $81,500         $85,000            $3,500

$5,000 debit adjustment         = $3,500 required ending debit balance + $5,000

credit adjustment (7/16/18) - $3,500 beginning

debit balance

2.       $3,500 credit balance   [$3,500 beginning credit balance - $5,000 debit

                                          adjustment (7/16/18) + $5,000 ending credit

adjustment]

3. FASB requires unrealized gain and losses to be reported as a part of income. The reason was that because trading securities are managed actively, income measurement for these securities are more relevant if it includes changes in fair value. In this way, company's net income includes the economic events occuring in a period. Hence, this treatment should provide a better measure of the company's return on investment.