Question

Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, its first year of operations. The cost and fair value of this portfolio on December 31, 2016, was as follows:

1	Name	Number of Shares	Total Cost	Total Fair Value
2	Tornado Inc.	800.00	$14,000.00	$15,600.00
3	Tsunami Corp.	1,250.00	31,250.00	35,000.00
4	Typhoon Corp.	2,140.00	43,870.00	42,800.00
5	Total		$89,120.00	$93,400.00

On June 12, 2017, Hurricane purchased 1,450 shares of Rogue Wave Inc. at $45 per share plus a $100 brokerage commission.

Required:

A.	Provide the journal entries to record the following (refer to the Chart of Accounts for exact wording of account titles and be sure to enter the year as part of the date): 1. The adjustment of the available-for-sale security portfolio to fair value on December 31, 2016. 2. The June 12, 2017, purchase of Rogue Wave Inc. stock.
B.	How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

Answer 1

Solution A:

Journal Entries - Hurricane INC.
Date	Particulars	Debit	Credit
31-Dec-16	Investment in Torando INC. - Available for Sale Dr	$1,600.00
	Investment in Tsunami Corp. - Available for Sale Dr	$3,750.00
	To Investment in Typhoon Corp. - Available for Sale		$1,070.00
	To Unrealized holding gain on investment (OCI)		$4,280.00
	(Being fair value adjustment on AFS securities)
12-Jun-17	Investment in Rough Wave INC. - Available for Sale Dr (1450*$45 + $100)	$65,350.00
	To Cash		$65,350.00
	(Being investment made in share of Rough Wave)

Solution B:

Unrealized gains and losses on available for sale securities does not become part of earnings for company instead they are reported in "Other comprehensive Income". However for trading securties any change in fair value should be recoganized in income statement and become part of earnings of the company.