Question

Melrose Company has an investment in bonds issued by Roscoe Industries that are classified as available-for-sale securities. The bonds were purchased at par. At December 31, Year 2, the Investment in Roscoe bonds account had a debit balance of $200,000, representing its amortized cost, and its Fair value adjustment account had a credit balance of $5,000. On December 31, Year 3, the amortized cost of those bonds had not changed, but the fair value of those bonds was $225,000.
Which of the following will be included in the related journal entry dated December 31, Year 3?

a. Debit to Fair value adjustment for $20,000.
b. Credit to Fair value adjustment for $20,000.
c. Debit to Fair value adjustment for $30,000.
d. Credit to Fair value adjustment for $30,000.

Answer 1

Answer:

c. Debit to Fair value adjustment for $30,000.

Explanation:

The Journal entry is shown below:-

On Dec 31,

Fair value adjustment account Dr, $30,000   ($225,000 + $5,000 - $200,000)

         To Unrealized holding gain on available for sale securities $30,000

(Being unrealized holding gain is recorded)

Here we debited the fair value adjustment account as it decreased the liabilities   and we credited the unrealized holding gain on available for sale securities as it increased the gain so the same is recorded .