Name Number of Shares Total Cost Total Fair Value
Tornado Inc. 800 $14,000 $15,600
Tsunami Corp. 1,250 31,250 35,000
Typhoon Corp. 2,140 43,870 42,800
Total $89,120 $93,400
On June 12, 2015, Hurricane purchased 1,450 shares of Rogue Wave Inc. at $45 per share plus a $100 brokerage fee.
a. Provide the journal entries to record the following:
1. The adjustment of the available-for-sale security portfolio to fair value on December 31, 2014.
2. The June 12, 2015, 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:
a. 1.
2014
Dec. 31 Valuation Allowance for Available-forSale
Investments 4,280
Unrealized Gain (Loss) on Availablefor-Sale
Investments 4,280
$93,400 – $89,120.
2.
2015
June 12 Investments—Rogue Wave Inc.* 65,350
Cash 65,350
*(1,450 shares × $45 per share) + $100
b. Unrealized gains and losses for available-for-sale securities are accumulated over
time and reported as a credit (positive) or debit (negative) balance in the Stockholders’
Equity section. As a result, the changes in fair value are not reflected on the income
statement, as is the case with trading securities. Bypassing the income statement
is supported on the grounds that available-for-sale securities will be held for a longer
time than trading securities; thus, fluctuations in market prices have a greater
opportunity to “cancel out” over time.