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) Journal Entries
Date	General Journal	Debit($)	Credit
May.3, 2018	Available for sale debt securities( C )	$50,000
	Cash A\c		$50,000
	(Purchased C debt securities)
July.1, 2018	Cash	$26,000
	Unrealized Gain - OCI	$5,000
	Available for sale debt securities (A)		$25,000
	Interest Income		$1,000
	Realized Gain on Sale of Debt Security A		$5,000
	(Sold all of the A securities )
Dec.31, 2018	Cash	$800
	Interest Income		$800
	(Interest received on B and C debt securities)
Dec.31, 2018	Available for sale debt securities (C )	$2,500
	Unrealized Gain (loss) - OCI		$2,500
	(Fair value adjustment as on Dec31, 2018)
	(Unrealized Gain (B) = 29,000 - 29,000 = $0)
	(Unrealized Gain (C ) = 52,500 - 50,000 = $2,500)

Note 1 --- Unrealized Gain / (Loss) as on 1/1/18	Cost	Fair Value 1/1/18	Unrealized Gain (Loss)
Security A	$20,000	$25,000	$5,000
Security B	$30,000	$29,000	-$1,000

2) Unrealized Gain (loss) balance as on Dec.31, 2018
Beginning balance of Unrealized Gain / (Loss) of Security B	($1,000)
Plus: Fair Value adjustment as on Dec.31, 2018
-- Unrealized Gain on available for sale securities as on Dec31, 2018
Security B (29,000 - 29,000)	$0
Security C (52,500 – 50,000)	$2,500
Unrealized Gain Account balance as on Dec 31, 2018	$1,500

3) Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as available for sale securities and reported at fair value, with unrealized gain and losses included in earnings.

The unrealized gain will not be actually realized until the company actually sells the stock and collects the cash