Final answer:
The journal entry to adjust the stock portfolio's value involves debiting the Fair Value Adjustment account by $200, debiting Unrealized Gain on Stock Investments by $500, and crediting Fair Value Adjustment by $700, to reflect the increase in fair value.
Step-by-step explanation:
To prepare the journal entry for Cleveland Company's stock portfolio at year-end, we need to account for the increase in the fair value of the stocks. The portfolio has increased in value from its original cost of $3,300 to a current fair value of $4,000, which is an increase of $700. Since the Fair Value Adjustment account has a debit balance of $200, we need to credit this account to adjust it to the fair value increase of $700.
The journal entry would be: Debit Fair Value Adjustment (to remove the existing debit balance): $200. Debit Unrealized Gain on Stock Investments (to record the additional increase): $500. Credit Fair Value Adjustment (to record the total increase in value): $700. This entry ensures that the change in fair value is accurately reflected in the financial statements.