Question

Blight Financial has an investment in bonds issued by Searing Industries that are classified as trading securities. At December 31, Year 2, the Investment in Searing bonds account had a debit balance of $500,000, and the bonds were purchased at par so the $500,000 equals amortized cost. The Fair Value Adjustment account had a debit balance of $20,000. On December 31, Year 3, the amortized cost of those bonds has not changed, but the fair value of those bonds was $515,000. Which of the following will be included in the related journal entry dated December 31, Year 3?

a. Debit to Fair value adjustment for $5,000
b. Credit to Fair value adjustment for $5,000
c. Debit to Fair value adjustment for $25,000
d. Credit to Fair value adjustment for $25,000

Answer 1

Answer:

b. Credit to Fair value adjustment for $5,000

Explanation:

Particulars                                Amount

Beginning balance of fair value adjustment   $20,000

Less: Unrealized gain on Dec 31, year 3         $15,000  ($515,000-$500,000)

Credit to Fair value adjustment                      $5,000

So, Credit to Fair value adjustment for $5,000 will be included in the related journal entry dated December 31, Year 3.