Question

Jerome, Inc, owned a single short-term available for sale security with a cost of $40,000 and a fair value of $40,500 at December 31 of the previous year. At that time, an adjusting entry was recorded for the fair value adjustment with a debit to Fair Value Adjustment- Available for sale for $500 and a credit to Unrealized Gain Equity for $500. Jerome sold that security for $39.900 on January 4 of the current year. Complete the necessary journal entry for January 4th by selecting the account names from the pull-down menus and entering the dollar amounts in the debit and credit columns. (Assume that the portion of the entry that removes the balance in the Unrealized Gain --Equity and Fair Value Adjustment-Available for sale (ST) accounts will be made in a separate journal entry) Answer is not complete. Date Debit 100 Credit General Journal Fair value adjustment - Trading Unrealized loss Equity an 4 100

Answer 1

Journal Entry for the sale of available-for-sale securities at loss (sold less than its book value):

Date	General Journal	Debit	Credit
Jan. 4	Cash	$39,900
	Loss on Sale of Available-for-sale securities ($40,000 - $39,900)	$100
	Available-for-sale securities		$40,000
	(To record the sale of available-for-sale securities at loss)

Explanation:

The available-for-sale security is a short-term investment and it is an asset which always has debit balance so when it is sold, its balance decreases so it is credited with its original value of $40,000 in order to balance its value in the books.

When this security is sold, cash which is an asset and always has debit balance increases so it is debited with sale value of $39,900.

The difference of $100 is a loss because the security is sold at a value ($39,900) less than its original value ($40,000) so the loss is debited as shown in the journal entry.

Answer 2

Answer with explanation:

No. Credit 1 Debit 39,900 100 Date General Journal Jan 4 Cash Loss on sale of debt investment Debt investment (To record the sale of available-for-sale securities at a loss) 40,000

The available-for-sale security, being a short-term debt investment, is an asset. When the company sell the asset, its balance will get reduced. Therefore, assets when purchased, its value will be increased and is debited and when it is sold, its value will be reduced and is credited with its original value of $40,000.
The debt investment is sold for cash $39,900. Therefore, cash being an asset is debited because it is increased. The difference between sales proceeds and cost of the investment is considered as gain/ loss on sale of debt investments. Here, it is a loss of $100 ($39,900 - $40,000).

Note: You can also write 'available for sale securities' in place of 'debt investment'.