Final answer:
To adjust the fair value of an available-for-sale bond with an increased value of $5,000, S&L Financial would credit the Fair Value Adjustment account for $25,000, reflecting the total increase in fair value and offsetting the previous debit balance.
Step-by-step explanation:
The journal entry to adjust the fair value of a bond classified as available-for-sale by S&L Financial on December 31, 2018, would require a credit to the Fair Value Adjustment account. Since the bond's fair value is now $825,000 and the amortized cost is $800,000, the fair value has increased by $25,000. But the Fair Value Adjustment account already has a debit balance of $20,000. Therefore, we need to credit the account by $25,000 to adjust it for the total increase in fair value. The correct journal entry option is d: Credit to fair value adjustment for $25,000, balancing the debit balance and bringing the adjustment to the new fair value of the bond.
The entry would also include a debit to Unrealized Holding Gain on AFS Investments—OCI (Other Comprehensive Income) for $25,000. This represents the increase in fair value that is not realized through sale but reflected in the comprehensive income until the bond is actually sold. Note that this is an accounting entry and does not reflect actual cash flow.