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At the beginning of 2018, Ace Company had the following portfolio of investments in available-for-sale debt...

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Accounting

At the beginning of 2018, Ace Company had the followingportfolio of investments in available-for-sale debt securities (allof which were acquired at par value):

Security

Cost

1/1/2018 Fair Value

A$20,000$25,000
B30,00029,000
Totals$50,000$54,000

During 2018, the following transactions occurred:

May 3Purchased C debt securities at their par value for$50,000.
July 1Sold all of the A securities for $25,000 plus interest of$1,000.
Dec. 31Received 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
C52,500

Required:

1.Prepare journal entries to record the precedinginformation.
2.What is the balance in the Unrealized Holding Gain/Loss accounton December 31, 2018?
General journal

3. What justification does the FASB give for its treatment ofunrealized holding gains and losses for available-for-salesecurities?

FASB requires unrealized gains and losses for available-for-salesecurities to be reported as a component of other comprehensiveincome because:

IReporting unrealized gains and losses in income foravailable-for-sale securities would create unnecessary volatilityin a company's reported net income.
IIThe securities are actively managed making the inclusion ofgains and losses irrelevant.

Answer & Explanation Solved by verified expert
3.8 Ratings (391 Votes)
1 Journal Entries Date General Journal Debit Credit May3 2018 Available for sale debt securities 50000 Cash 50000 Purchased debt securities July1 2018 Cash 26000 Unrealized Gain OCI 5000 Available for sale debt securities A 25000 Interest Income 1000 Realized Gain on Sale of Debt Security A 5000 Dec31 2018 Cash 7600 Interest Income 7600 Interest received on B and C debt securities Dec31 2018    See Answer
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