Question

Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company's available-for-sale debt securities have a fair value 60,000 below cost?

Answer 1

To adjust for the decrease in fair value of available-for-sale debt securities, Laura Company should debit Unrealized Loss on Available-for-Sale Securities and credit Fair Value Adjustment by $60,000.

Step-by-step explanation:

To prepare the adjusting entry at year-end for available-for-sale debt securities that have a fair value of $60,000 below cost, Laura Company would need to recognize an unrealized loss. The adjusting entry would be a debit to an unrealized loss account (often titled 'Unrealized Loss on Available-for-Sale Securities') and a credit to the 'Fair Value Adjustment' account. Here's what the journal entry would look like:

• Debit: Unrealized Loss on Available-for-Sale Securities $60,000
• Credit: Fair Value Adjustment $60,000

This entry reflects a decrease in the value of the debt securities and is reported in the comprehensive income section of shareholders' equity rather than on the income statement because the securities have not been sold.