Question

Hendricks Corporation purchased trading investment bonds for \(50,000 at par. On December 31, Hendricks received an annual interest of \)2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Short answer

1. The amount debited to debt investment is $50,000.
2. The amount of rent received is $2,000.
3. The unrealized holding income is $2,600.

Step-by-step solution

Definition of the fair value adjustment

It is the process in which the book value and purchase price are adjusted.

Journal entry of the purchase of the investment

Date	Description	Debit	Credit
A.	Debt Investment	$50,000
	Cash		$50,000
	Being entry to record the purchase of bonds

Journal entry for the interest received

Date	Description	Debit	Credit
B	Cash	$2,000
	Interest Revenue		$2,000
	Being entry of rent received

Adjustment entry for the fair value

Date	Description	Debit	Credit
C	Unrealized holding loss- Income	$2,600
	Fair value adjustment		$2,600
	Being year-end adjustment entry of fair value