The following records of Jamaican Importers Inc. at January 1, 2016 include the
ID: 2563275 • Letter: T
Question
The following records of Jamaican Importers Inc. at January 1, 2016 include the following:
Assets:
Investment in GE Common shares $73,000
Add: Fair value Adjustment $2000
Shareholders' Equity:
Accumulated unrealized holding gains and loses $2000
No changes occurred during 2016 in the investment portfolio. Assuming that the fiar value of GE common stock was $66000 on Dec 31, 2016, the adjusting journal entry should include a:
A. Debit to Fair Value Adjustment for $7000
B. Credit to Fair value Adjustment for $7000
c. Debit to Fair value Adjustment for $5000
D. No adjusting is nevessary for this transaction
Please show how you got the answer so I can learn.
Explanation / Answer
As per the accounting standards, at each reporting date the investment in the shares of a company are required to be reported at fair values fo such shares. In the givend question:
Fair Value of GE Shares = $66,000
Book Value of such shares = $73,000
Unrealized Gain = $2,000
The unrealized gain on shares will be provided in the books at the end of the year only. However at the end of the year there is unrealized loss on sale of shares amounting to $73,000 - $66,000 = $7,000.
Therefore the following journal entry is required to be passed
Unrealized Loss on sale of shares.....Dr. $7,000
TO Fair Value Adjustement A/c $7,000
Correct answer is B. Fair Value adjustment a/c will be deducted from Investment in GE shares account
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