Question

On February 18, 2021, Union Corporation purchased 600 IBM bonds as a long-term investment at their face value for a total of $600,000. Union will hold the bonds indefinitely, and may sell them if their price increases sufficiently. On December 31, 2021, and December 31, 2022, the market value of the bonds was $580,000 and $610,000, respectively. Required: 2. & 3. Prepare the adjusting entry for December 31, 2021 and 2022.

Answer 1

Adjusting Entry for decrease in Fair Value of $20,000 from $600,000 to $580,000 on December 31, 2021

Dr Unrealized Loss on Investment (Other Comprehensive Income) $20,000

Cr Investment (Fair Value Adjustment) $20,000

Adjusting Entry for increase in Fair Value of $30,000 from $580,000 to $610,000 on December 31, 2022

Dr Investment (Fair Value Adjustment) $30,000

Cr Unrealized Gain on Investment (Other Comprehensive Income) $30,000

Step-by-step explanation:

This investment will be classified as "Available for Sale" as the anticipated sale date is not within the next 12 months. Available for sale long-term investments are recorded at cost when purchased and subsequently adjusted to reflect their fair values at the end of each reporting period. Unrealized holding gains or losses are kept as "other comprehensive income" until the long-term investment has been sold.

It will not be classified as "Held to Maturity Investment" as Union Corporation does not intends to keep this investment until maturity and may sell them if its price increases sufficiently.