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?

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 152 Prepaid Insurance 181 Equipment 189 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings 339 Unrealized Holding Gain/Loss: Available-for-Sale Securities	REVENUE 411 Sales Revenue 431 Interest Income 432 Dividend Income 434 Gain on Sale of Available-for-Sale Securities EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

General Journal

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Prepare journal entries to record the 2018 transactions. Additional Instructions

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PAGE 1

GENERAL JOURNAL

Score: 108/150

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	✔	✔		✔
2		✔			✔
3	✔
4		✔		✔
5		✔
6		✔			✔
7		✔			✔
8		✔
9		✔
10
11
12		✔

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

Answer 1

1. In the books of Ace Company:

Date	Account Titles	Debit	Credit
		$	$
May 3	Investment in Available for Sale Securities	50,000
	Cash		50,000
July 1	Cash	26,000
	Investment in Available for Sale Securities		20,000
	Interest Income		1,000
	Gain on Sale of Available for Sale Securities		5,000
July 1	Unrealized Holding Gain / Loss : Available for Sale Securities	5,000
	Allowance for Change in Fair Value of Investment		5,000
Dec 31	Cash	7,600
	Interest Income		7,600
Dec 31	Allowance for Change in Fair Value of Investment	2,500
	Unrealized Holding Gain / Loss: Available for Sale Investments		2,500

2. Balance in Unrealized Holding Gain / Loss account as on December 31, 2018 : $ 1,500

3. FASB requires unrealized gains and losses on available for sale securities to be reported as a component of Other Comprehensive Income, and not as a component of Current Income. The reason is that because available for sale securities are not actively managed, the changes in value do not contribute to income measurement or their effect on the company's return on investment.