Final answer:
To adjust an investment to fair value, a journal entry is made that either debits the Fair Value Adjustment account and credits Unrealized Gain on Investment or vice versa, depending on whether the fair value has increased or decreased.
Step-by-step explanation:
Adjusting Investment to Fair Value Journal Entry
To adjust an investment to its fair value, a company must create a journal entry that reflects the change in value of that investment over a specific period. Assuming the fair value of the investment has increased, the entry would require debiting the Fair Value Adjustment account and crediting an Unrealized Gain on Investment account, which is reported in the equity section of the balance sheet under Accumulated Other Comprehensive Income. Conversely, if the fair value has decreased, one would debit an Unrealized Loss on Investment account and credit the Fair Value Adjustment account.
For example, if an investment was originally purchased for $10,000 and its fair value at the end of the accounting period is $12,000, the journal entry to adjust the investment to fair value would be:
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- Debit the Fair Value Adjustment account for $2,000
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- Credit the Unrealized Gain on Investment account for $2,000
This entry increases the value of the investment on the balance sheet to reflect the new fair value and recognizes the unrealized gain in equity. All changes are reported in the financial statements in accordance with applicable accounting standards, such as GAAP or IFRS.