Addison Manufacturing holds a large portfolio of debt and equity securities as an investment. The fair value of the portfolio is greater than its original cost, even though some securities have decreased in value. Ted Abernathy, the financial vice president, and Donna Nottebart, the controller, are near year-end in the process of classifying, for the first time, this securities portfolio in accordance with FASB Statement No. 115. Abernathy wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as available-for-sale (equity securities) and as held-to-maturity (debt securities).Nottebart disagrees. She wants to classify those securities that have decreased in value as trading securities and those that have increased in value as available-for-sale and held-to-maturity. She contends the company is reporting a good earnings year and that recognizing the losses helps to smooth income this year. As a result, the company will have built-in gains for future periods when the company may not be as profitable.Discuss which treatment you would choose for determining the fair value of the equity investments. Use factual information to justify your treatment choice.
Addison Manufacturing holds a large portfolio of debt and equity securities as an investment. The fair value of the portfolio is greater than its original cost, even though some securities have decreased in value. Ted Abernathy, the financial vice president, and Donna Nottebart, the controller, are near year-end in the process of classifying, for the first time, this securities portfolio in accordance with FASB Statement No. 115. Abernathy wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as available-for-sale (equity securities) and as held-to-maturity (debt securities).Nottebart disagrees. She wants to classify those securities that have decreased in value as trading securities and those that have increased in value as available-for-sale and held-to-maturity. She contends the company is reporting a good earnings year and that recognizing the losses helps to smooth income this year. As a result, the company will have built-in gains for future periods when the company may not be as profitable.Discuss which treatment you would choose for determining the fair value of the equity investments. Use factual information to justify your treatment choice.
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Available-for-Sale Securities
At the beginning of 2013, Ace Company had the followingportfolio of investments in available-for-sale securities (commonstock):
| Security | Cost | 12/31/12 Fair Value |
| A | $24,300 | $28,800 |
| B | 28,400 | 27,300 |
| Totals | $52,700 | $56,100 |
During 2013 the following transactions occurred:
| May 3 | Purchased C securities (commonstock) for $11,300. |
| July 16 | Sold all of the A securities for$28,800. |
| Dec. 31 | Received dividends of $700 on the Band C securities, for which the following information wasavailable: |
| 12/31/13 Fair Value | |
| B | $30,400 |
| C | 14,200 |
1. Prepare journal entries to record the preceding information.For compound entries, if an amount box does not require an entry,leave it blank.
| 2013 | investments in available for sale securities | $????? | |
| May 3 | cash | $????? | |
| July 16 | cash | $????? | |
| sale | investments in available for sale securities | $????? | |
| gain on sale of available for sale securities | $????? | ||
| July 16 | unrealized holding gain/loss: available for salesecurities | $????? | |
| adj | allowance for change in fair value of investment | $????? | |
| Dec 31 | cash | $????? | |
| divd | dividend income | $????? | |
| Dec 31 | allowance for change in fair value of investment | $????? | |
| adj | unrealized holding gain/loss: available for salesecurities | $????? |
2. What is the balance in the Unrealized Holding Gain/Lossaccount on December 31, 2013?
$??????
