Debit: Unrealized Loss on Trading Securities $5,100
Credit: Fair Value Adjustment (Trading Securities) $5,100
To adjust the trading debt securities to their fair value, Sandhill, Inc. needs to create an adjusting journal entry that reflects the unrealized gains or losses in the fair value of these securities as of December 31, 2022. This involves comparing the cost of the securities with their fair value at the reporting date.
First, let's calculate the unrealized gain or loss for each security:
1. Security A:
- Cost: $18,060
- Fair Value: $15,800
- Unrealized Loss: $18,060 - $15,800 = $2,260
2. Security B:
- Cost: $11,900
- Fair Value: $15,660
- Unrealized Gain: $15,660 - $11,900 = $3,760
3. Security C:
- Cost: $24,480
- Fair Value: $17,880
- Unrealized Loss: $24,480 - $17,880 = $6,600
Next, calculate the total unrealized gain or loss:
- Total Unrealized Gain/Loss = Unrealized Gain (Security B) - Unrealized Loss (Security A + Security C)
- Total Unrealized Gain/Loss = $3,760 - ($2,260 + $6,600)
- Total Unrealized Gain/Loss = $3,760 - $8,860
- Total Unrealized Gain/Loss = -$5,100
Since the total is a loss, Sandhill, Inc. needs to record an unrealized loss of $5,100 to adjust the trading securities to their fair value.
The adjusting journal entry on December 31, 2022, would be:
Debit: Unrealized Loss on Trading Securities $5,100
Credit: Fair Value Adjustment (Trading Securities) $5,100
This entry increases the unrealized loss account (an income statement account reflecting a loss) and decreases the fair value adjustment account (a contra-asset account that adjusts the value of the trading securities on the balance sheet).