Question

Littlefield Industries purchased a bond on September 1 of the current year for​ $200,000 and classified the investment as trading debt. The market value of the trading debt investment at​ year-end is​ $196,000. The adjustment is​ ______.

Answer 1

The adjustment is:

Debit Unrealized Loss Account with $4,000

Credit Trading Debt Fair Value Adjustment Account with $4,000.

Step-by-step explanation:

Held for trading assets are form of investment that an entity holds for the purpose of selling them within a short term period. The changes in these investments are recognized in the statement of comprehensive income for the period and are taken to fair value adjustment account.

The accounting entries to pass for each event are listed below:

Increase in market value: Debit the asset fair value adjustment account

Credit the unrealized gain account.

Decrease in market value: Credit the asset fair value adjustment account

: Debit the unrealized loss account.

In the case of Littlefield industries, there was a loss of $4,000 ( $200,000 - $196,000). So the fair value adjustment account will be credited with $4,000 to bring the investment value down to $196,000 and a corresponding debit entry will be recognized as unrealized loss and transfer to income statement for the year.