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	$25,000	$31,000
B	38,000	36,000
Totals	$63,000	$67,000

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 $31,000 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	$42,000
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?

Answer 1

W.N	Calculation of Unrealized gain /loss as on 1/1/2018
		Cost	Fair Value-1/1/18	Unrealized Gain/(Loss)
	Security A	25000	31000	6000
	Security B	38000	36000	-2000
1	Prepare journal entries to record the preceding information.
	Date	Account Title	Debit	Credit
	May.3, 2018	Available for sale debt securities-C	$50,000
		Cash		$50,000
		(Purchased debt securities)
	July.1, 2018	Cash	$32,000
		Unrealized Gain - OCI	$6,000
		Available for sale debt securities (A)		$31,000
		Interest Income		$1,000
		Realized Gain on Sale of Debt Security A		$6,000
	Dec.31, 2018	Cash	$1,000
		Interest Income		$1,000
		(Interest received on B and C debt securities)
	Dec.31, 2018	Available for sale debt securities (B)	$6,000
		Available for sale debt securities (C )	$3,000
		Unrealized Gain (loss) - OCI		$9,000
		(Fair value adjustment as on Dec31, 2018)
	WN	Unrealized Gain (B) = 42000 - 36,000 = $6000
		Unrealized Gain (C ) = 53,000 - 50,000 = $3,000
2	What is the balance in the Unrealized Holding Gain/Loss account on December 31, 2018?
	Beginning balance of Unrealized Gain/(Loss) of Security B		-2000
	Add:fair value adj as on Dec 31 2018
	Unrealized gain -B	(42000-36000)	6000
	Unrealized gain -C	(53000-50000)	3000
	Unrealized Gain account Balance as on Dec 31 2018		7000
3	Next Level What justification does the FASB give for its treatment of unrealized holding gains and losses for available-for-sale securities?
	The justification given by FASB regarding treatment of unrealized holding gains/losses available for sale securities is that the debt
	securities which are held for selling in the near future are classified as held for sale securities and thus reported at fair value.
	The unrealized gains will not be realized until and unless the sale of securities is done and subsequently the cash is realized.