Question

1. On July 1, 2020, IBM Inc. purchased a 3-year, $50,000 bond with a June 30, 2023 maturity date. The bond’s stated rate of interest was 5%, paid semiannually (June 30 and December 31). The bond was purchased at face value for $50,000 and properly reported as a trading security.

   The fair market value of the bond purchased by IBM was $51,000 on December 31, 2020.

   What was the balance in the Securities Fair Value Adjustment account at December 31, 2020? What was the net dollar impact of the adjustment to the SFVA Adjustment account on 2020 income before income taxes?

   		SFVA Balance: $1,000 Cr Effect of Net Income: no effect
   		SFVA Balance: $1,000 Cr Effect of Net Income: $1,000 increase
   		SFVA Balance: $1,000 Dr Effect of Net Income: $1,000 increase
   		None of the other answer choices is correct.
   		SFVA Balance: $1,000 Dr Effect of Net Income: $1,000 decrease
   		SFVA Balance: $1,000 Dr Effect of Net Income: no effect
   		SFVA Balance: $1,000 Cr Effect of Net Income: $1,000 decrease

Answer 1

solution:

Correct Answer is Second option :

SFVA Balance: $1,000 Cr

Effect of Net Income: $1,000 increase

Explanation:

Bond is a trading security , so it will be shown at fair market value at 31 dec 2020.

Any increase or decrease on revaluation will be adjusted through Bond value Securities Fair Value Adjustment account.

Increase in value of security = Fair market value on 31 Dec. - Book Value on 30 june

= $ 51,000- 50,000 = $ 1,000

Following Journal entry will be passed on revaluation:

investment in bonds A/c Debit $ 1,000

  Securities Fair Value Adjustment account. Credit $ 1,000

and after the above entry, the balance of SFVA account will be transferred to Profil and loss account .

following journal entry will be passed to record profit on revaluation:

Securities Fair Value Adjustment account. debit   $ 1,000

Profit and loss A/c Credit $ 1,000

and thus the income will Increase by $ 1,000.

Finish.