What is the journal entry to adjust the investment security to fair value?

QUESTION:

Company C has a portfolio of trading securities that includes a stock that was purchased for $1,000. At the end of the reporting period, the market price of the stock has decreased to $800. What is the journal entry to adjust the investment security to fair value?


ANSWER;

Here is the journal entry to adjust the investment security to fair value:

Debit Unrealized loss on trading securities (expense) for $200

Credit Investment in trading securities (asset) for $200

To record the adjustment of the investment security to fair value.

The adjustment is necessary because under the fair value accounting method, trading securities must be recorded at their fair value at the end of each reporting period. In this case, the fair value of the stock is $800, which is $200 less than the purchase price of $1,000.

The unrealized loss of $200 is recognized in the income statement as an expense and is recorded as a debit to the unrealized loss on trading securities account. The credit to the investment in trading securities account reduces the carrying value of the investment to its fair value of $800.

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