Final answer:
Union Corporation's adjusting entries for the bond investments would be based on changes in fair market value and depend on if the bonds are classified as available-for-sale. They would adjust the investment accurately with corresponding entries to Other Comprehensive Income.
Step-by-step explanation:
The question involves the accounting treatment of changes in the fair value of long-term bond investments by a corporation. Union Corporation purchased IBM bonds at their face value, and the market value of these bonds changed over the following two years. According to most accounting standards, such as the Generally Accepted Accounting Principles (GAAP), investments like these could be classified as available-for-sale or held-to-maturity securities, depending on the company's intent.
For available-for-sale securities, the unrealized gains or losses (those that are not yet realized through a sale) would typically be reported in other comprehensive income rather than the income statement, and the investment would be adjusted to its fair market value on the balance sheet. Assuming Union Corporation has classified the IBM bonds as such, on December 31, 2024, the adjusting entry to write down the investment to its fair market value of $793,000 would be a debit to Other Comprehensive Income and a credit to the bond investment account for the amount of $26,000 ($819,000 - $793,000).
On December 31, 2025, an adjusting entry would be made to record the increase in the bond's value by debiting the investment account and crediting Other Comprehensive Income for the amount of $39,000 ($832,000 - $793,000).
However, if the bonds were classified as held-to-maturity, there would be no adjustment for changes in market value, and the bonds would continue to be reported at amortized cost, unless there is evidence of a permanent impairment in value.