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	1/1/18 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
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

Prepare journal entries to record the 2018 transactions. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
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5
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8
9
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What is the balance in the Unrealized Holding Gain/Loss account on December 31, 2018?

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.

I only

II only

I and 2

Neither 1 nor II

Answer 1

Ans-1- Journal Entries

Date	Account Title and Explanation	Debit	Credit
May 3, 2018	Available for sale debt securities	$50,000
	Cash		50,000
	(To record purchased debt securities)
July 1, 2018	Cash	45,000
	Unrealized Gain-OCI	9,000
	Available for sale debt securities (A)		44,000
	Interest Income		1,000
	Realized Gain on Sale of Debt Security A		9,000
	(To record sold all of A Security)
Dec.31,2018	Cash	1,000
	Interest Income		1,000
	(To record interest received on B and C debt securities)
Dec.31,2018	Available for sale debt securities (B)	8,000
	Available for sale debt securities (C)	3,000
	Unrealized Gain (loss)-OCI		11,000
	(Fair value adjustment as on Dec.31, 2018)
	(Unrealized Gain (B)= 58,000-50,000=8,000)
	(Unrealized Gain (C)= 53,000-50,000= 3,000

Note-1 Unrealized Gain/(Loss) as on 1/1/18

	Cost	Fair Value 1/1/18	Unrealized Gain / (Loss)
Security A	$35,000	$44,000	$9,000
Security B	$53,000	$50,000	-$3,000

2-Calculating Unrealized Gain (loss) balance as on Dec.31,2018

Beginning balance of Unrealized Gain (loss) of Security B	($3,000)
Add: Fair value adjustment as on Dec. 31, 2018
Unrealized Gain on available for sale securities as on Dec.31,2018
Security B (58,000-50,000)	$8,000
Security C (53,000-50,000)	$3,000
Unrealized Gain Account balance as on Dec.31,2018	$8,000

3- Debt securities that are bought and held principally for the purpose of selling them in the near team 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.

4- The correct option is 2 only)