Question

At December 31, 2020, the available-for-sale debt portfolio for Carla, Inc. is as follows. Unrealized Gain (Loss) $(4,125) 2,475 4,125 B Security Cost Fair Value $28,875 $24,750 20,625 23,100 C 37,950 42,075 Total $87,450 $89,925 Previous fair value adjustment balance- Dr. Fair value adjustment-Dr. 2.475 660 $1,815 On January 20, 2021, Carla, Inc. sold security A for $24,915. The sale proceeds are net of brokerage fees. Prepare the adjusting entry at December 31, 2020, to report the portfolio at fair value. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

Carla Inc. At 12/31/2020 Journal Entry Date Particulars Fair Value Adjustment-AFS Debt Investment To Unrealized Holding Gain / Loss - Equity Debit in $ Credit in $ 1815 1815 G/L Add: FV adj FV on B/S 87450 2475 89925 The portfolio should be reported at the fair value of $89,925. Since the cost of the portfolio is $87,450, the unrealized holding gain is $2,475, of which $660 is already recognized AJE Fair Value Adjustment Bal 660 1815 2475 Accum OCI -Unrealized Holding G/L in Equity 660 Bal 1815 AJE 2475

Partial Balance Sheet As of December 31, 2020 Current assets: Debt investments 89925 Stockholders' equity: Common stock XXXX Paid-in capital in excess of par-Common stock XXXX Retained earnings XXXX Accumulated other comprehensive income-Unrealized Holding G/L. 2475 Total stockholders' equity XXXXXXX Note: The Unrealized Holding Gain of $1,815 would also be disclosed in the comprehensive income statement. Computation of realized gain or loss on sale of stock: Net proceeds from sale of security A Cost of security A Loss on investments 24915 28875 -3960 Cash a/c Dr. Loss on Sale of Investments a/c Dr. To Debt Investments (Available-for-Sale) 24915 3960 28875 Since the debt securities are an available for sale investment, they are reported at fair value on the balance sheet. (Both the Debt Investment account and the Fair Value adjustment account are permanent accounts.) The Unrealized Holding Gain or Loss - Equity account is reported in Other Comprehensive Income. (It is not reported on the income statement.) This account is a temporary account that is closed in the closing entries to the Accumulated Other Comprehensive Income-Unrealized Holding G/L account which is a permanent account in equity on the balance sheet. ("Since the unrealized gain or loss does not appear on the income statement it is not closed to retained Earnings.) Dividend Revenue related to the debt security investments is reported on the income statement. This account is atemporary account that is closed in the closing entries to Retained Earnings.