Question

Cullumber Corporation purchased trading investment bonds for $55,000 at par. At December 31, Cullumber received annual interest of $2,200, and the fair value of the bonds was $52,500. Prepare Cullumber’s 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.)

Answer 1

The Journal entries are as follows:

(a) the purchase of the investment,

Investment in trading securities A/c Dr. $55,000

To cash $55,000

(To record purchase of the investment)

(b) the interest received,

(i) Interest receivable A/c Dr. $2,200

To interest on investment $2,200

(To record the interest received)

(ii) Cash A/c Dr. $2,200

To Interest receivable $2,200

(To record the interest income received)

(c) the fair value adjustment,

Unrealized loss- trading securities A/c Dr. $2,500

To Investment in trading securities $2,500

(To record the Unrealized loss when adjusted to fair value)

Workings:

Unrealized loss:

= Book value of the investment - Fair value of the investment

= $55,000 - $52,500

= $2,500