Question

If a company purchases its own long-term investments in AFS debt securities this period and their fair value is below cost at the balance sheet date, what entry is required to recognize this unrealized loss?

Answer 1

To recognize an unrealized loss on its own long-term investments in AFS debt securities, a company must make an adjusting entry by debiting the Unrealized Loss on AFS Debt Securities account and crediting the Allowance to Adjust Unrealized Loss account.

Step-by-step explanation:

When a company purchases its own long-term investments in available-for-sale (AFS) debt securities and the fair value of those securities is below cost at the balance sheet date, the company needs to recognize an unrealized loss. To recognize an unrealized loss on its own long-term investments in AFS debt securities, a company must make an adjusting entry by debiting the Unrealized Loss on AFS Debt Securities account and crediting the Allowance to Adjust Unrealized Loss account.

To do this, the company should make an adjusting entry by debiting the Unrealized Loss on AFS Debt Securities account and crediting the Allowance to Adjust Unrealized Loss account. The amount recorded will be the difference between the cost and fair value of the securities.