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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Available-for-Sale Securities At the beginning of 2019, Ace Company had the following portfolio of investments in available-for-sale debt securities (all of which were acquired at par value):

Chapter 13, Problem 12E, Available-for-Sale Securities At the beginning of 2019, Ace Company had the following portfolio of , example  1

During 2019. 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:

Chapter 13, Problem 12E, Available-for-Sale Securities At the beginning of 2019, Ace Company had the following portfolio of , example  2

Required:

  1. 1. Prepare journal entries to record the preceding information.
  2. 2. What is the balance in the Unrealized Holding Gain/Loss account on December 31, 2019?
  3. 3. Next Level What justification does the FASB give for its treatment of unrealised holding gains and losses for available for sale securities?

1.

To determine

Prepare the journal entries in the books of Company A.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Prepare the journal entries in the books of Company A.

DateAccount Title and Explanation Debit Credit 
May 3, 2019Investment in Available-for-Sale Securities$50,000  
 Cash $50,000
 (To record the purchase of C's securities)  
    
July 1, 2019Cash$26,000  
 Investment in Available-for-Sale Securities $20,000
 Gain on sale of Available-for-Sale Securities ($25,000$20,000) $5,000
    Interest income $1,000
 (To record the purchase of C's securities)  
    
July 1, 2019Unrealized holding gain/loss: Available-for-sale securities$5,000  
 Allowance for change in fair value of investment ($25,000$20,000)

2.

To determine

Calculate the balance in the unrealized holding gain/loss account on December 31, 2019.

3.

To determine

Explain the justification that would be given by FASB for the treatment of unrealized gain and losses for available-for-sale securities.

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