Question

Texan Textiles invested in two equity securities in December 2018. Neither investment represented significant influence. The company's fair value adjustment account has a balance of $0. The following information related to these securities:

Security         Purchase Date           Cost                Fair Value - 12/31/18

            1          12/1/18                        $27,300                       $32,500

            2          12/3/18                        44,600                         37,750

Record ALL journal entries needed for December relating to these securities. ACQUISITION AND VALUATION ENTRIES.

Answer 1

When the investment in shares is made and the investment is not involving significant influence, then the cost method of accounting of investment is used. It is also called as fair value method of accounting, in which the investments purchased are shown at the purchase price and any adjustment at the year end with respect to its price change is transferred in fair value adjustment account and second effect in unrealised gain or loss:

Accordingly the entries are as follows:

- Acquisition Entry:

Date		Debit	Credit
2018
1st.Dec	Equity Investment - Fair value method	27300
	To Cash		27300
	(Investment in shares- security 1)
3rd Dec	Equity Investment - Fair value method	44600
	To Cash		44600
	(Investment in shares- security 2)

- Valuation Entry:

Two seprate entries for fair value adjustment is made for better understanding , however we can also make one single entry by debiting the Net unrealised loss by $1650, and crediting the fair value adjustment account by $1650.

Date		Debit	Credit
2018
31st Dec	Equity Investment- Fair value Adjustment Account	5200
	To Unrealised gain on equity investment		5200
	(Adjustment of security 1 to fair value)
31st Dec	Unrealised loss on equity investment	6850
	To Equity Investment- Fair value Adjustment Account		6850
	(Adjustment of security 2 to fair value)