Final answer:
To record fair value adjustments and the sale of bonds, perform a series of debits and credits to the appropriate accounts such as Fair Value Adjustment, Unrealized Gain/Loss on Investments, Cash, and Investment in Bonds, depending on whether the fair value has increased or decreased and to capture the realized gain or loss upon sale of the bonds.
Step-by-step explanation:
To address the student's question regarding recording fair value adjustments and sale of investments, it's important to understand the accounting principles involved. Here are the entries you would make in a general ledger:
- Fair value adjustment on December 31, 2021: If the fair value of the bonds has increased, debit the Fair Value Adjustment account and credit the Unrealized Gain on Investments account for the increase amount. Conversely, if the fair value has decreased, the entry is reversed (debit Unrealized Loss on Investments and credit Fair Value Adjustment).
- Adjustment to fair value on the date of sale: Record an entry similar to step 1, adjusting the Fair Value Adjustment and Unrealized Gain/Loss on Investments accounts to represent the fair value on the sale date.
- Reverse the previous fair value adjustment: This is done to remove the adjustments made to the investment while it was held. You would debit the Unrealized Gain on Investments or credit the Unrealized Loss on Investments and do the opposite for the Fair Value Adjustment account.
- For the sale of investment in Coca Cola bonds, you would debit Cash for the amount received, credit the Investment in Bonds for the cost of the bond, and recognize any gain or loss on the sale of the investment (debit Loss on Sale of Investments/credit Gain on Sale of Investments, if applicable).
Note that your specific entries will depend on the amounts involved and the direction of the fair value adjustment (up or down).