Question

Walsh, Inc. began business on January 1, 2008, and at December 31, 2008, Walsh had the following investment portfolios of equity securities: Trading Available-For-Sale Aggregate cost 150,000225,000 Aggregate market value 120,000 185,000 None of the declines is judged to be other than temporary. Unrealized losses at December 31, 2008, should be recorded with corresponding charges against?

1) Retained Earnings
2) Accumulated Other Comprehensive Income
3) Common Stock
4) Accounts Receivable

Answer 1

Unrealized losses for Trading securities affect earnings and show up on the income statement, while for Available-For-Sale securities, losses are recorded in Other Comprehensive Income and not in earnings or retained earnings.

Step-by-step explanation:

You asked about the recording of unrealized losses at December 31, 2008, for Walsh, Inc. which had investment portfolios in equity securities.

For the Trading securities portfolio, where the aggregate cost is $150,000 with a market value of $120,000, the unrealized losses are recorded as a reduction in earnings, by debiting a valuation account and crediting a gain/loss in the income statement. The Available-For-Sale (AFS) securities portfolio, with an aggregate cost of $225,000 and a market value of $185,000, should have their unrealized losses recorded in Other Comprehensive Income (OCI) and not on the income statement.

The entry would be a debit to a valuation account and a credit to OCI, which would be presented as a separate component of shareholders' equity but not hit the income statement. This is because the declines are not considered to be other than temporary, and therefore, for AFS securities, the adjustments are made directly to equity and bypass the retained earnings.