Question

(a) Assuming no Fair Value Adjustment (available-for-sale)

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 securities have a fair value
$60,000 below cost. (b) Assume the same information
as part (a), except that Laura Company has a debit balance
in its Fair Value Adjustment account of $10,000 at
the beginning of the year. Prepare the adjusting entry at
year-end.

Answer 1

To prepare the adjusting entry for Laura Company's available-for-sale securities, debit the Fair Value Adjustment account for the decrease in fair value and credit the Unrealized Loss on Investments account. If there is a debit balance in the Fair Value Adjustment account at the beginning of the year, adjust for this balance as well.

Step-by-step explanation:

To prepare the adjusting entry for Laura Company's available-for-sale securities, we would debit the Fair Value Adjustment (available-for-sale) account for the decrease in fair value of $60,000 and credit the Unrealized Loss on Investments account for the same amount. The entry would be:Debit: Fair Value Adjustment (available-for-sale) - $60,000Credit: Unrealized Loss on Investments - $60,000If Laura Company has a debit balance of $10,000 in its Fair Value Adjustment account at the beginning of the year, we would need to adjust for this balance as well. The adjusting entry would be:Debit: Fair Value Adjustment (available-for-sale) - $50,000Credit: Unrealized Loss on Investments - $60,000Credit: Fair Value Adjustment (available-for-sale) - $10,000In addressing the question regarding the adjusting entries for Laura Company's available-for-sale securities:(a) Adjusting Entry for Available-for-Sale Securities Falling Below Cost.

The adjusting entry at the end of the year for available-for-sale securities that have a fair value $60,000 below cost, when no Fair Value Adjustment account balance exists at the beginning of the year, is:Debit to the Unrealized Loss on Available-for-Sale Securities account for $60,000.Credit to the Fair Value Adjustment (Available-for-Sale) account for $60,000.(b) Adjusting Entry with an Existing Fair Value Adjustment Debit BalanceAssuming that Laura Company has a debit balance in its Fair Value Adjustment account of $10,000 at the beginning of the year, the adjusting entry at year-end would be:Debit to the Unrealized Loss on Available-for-Sale Securities account for $50,000 (to adjust the cumulative loss to $60,000).Credit to the Fair Value Adjustment (Available-for-Sale) account for $50,000.It is important to correctly record these adjustments to reflect the changes in fair value of the securities in the financial statements