Question

(a) Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company’s available-for-sale debt securities have a fair value of \(60,000 below cost.

(b) Assume the same information as part (a), except that Laura Company has a debit balance in its Fair Value Adjustment account of \)10,000 at the beginning of the year. Prepare the adjusting entry at year-end.

Short answer

Amount transferred to unrealized gain or loss at year-end is $60,000.

Amount transferred to unrealized gain or loss at year-end is $70,000.

Step-by-step solution

Definition of the fair value adjustment

The process of adjusting the difference between the book and the fair value of a security is known as fair value adjustment.

Journal entry of part (a)

a. In this part, the fair value of the Laura company’s available for sale security is 60,000 less than the book value of the security. It means debt security has an unrealized loss. Following is the adjusting entry of the fair value:

Particulars		Debit ($)	Credit ($)
Unrealized Holding Gain or Loss Dr		$60,000
To Fair Value Adjustment			$60,000
(Adjustment of the less amount of fair value)
Accumulated Other Comprehensive Income Dr		$60,000
ToUnrealized Holding Gain or Loss			$60,000
(Reporting of unrealized loss in other comprehensive income)

Journal entry of part (b)

b. In this part, the opening balance of the fair value adjustment account is 10,000, and the current year’s unrealized loss is 60,000. Hence, the total amount of unrealized loss is 70,000. Following entries are made:

Particulars		Debit ($)	Credit ($)
Unrealized Holding Gain or Loss Dr		$70,000
To Fair Value Adjustment			$70,000
(Adjustment of the less amount of fair value)
Accumulated Other Comprehensive Income Dr		$70,000
ToUnrealized Holding Gain or Loss			$70,000
(Reporting of unrealized loss in other comprehensive income)