Question

S&L Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2021, S&L purchased Coca-Cola bonds at par for $887,000 and sold the bonds on January 3, 2022, for $896,000. At December 31, the bonds had a fair value of $879,000, and S&L has the intent and ability to hold the investment until fair value recovers.

Prepare journal entries to record (a) any unrealized gains or losses occurring in 2021 and

(b) the sale of the bonds in 2022, including recognition of any unrealized gains in 2022 prior to sale and reclassification of amounts out of OCI. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• 1. Record the entry for fair value adjustment of December 31, 2021.

• 2 Record the entry to adjust to fair value on the date of sale.

• 3 Record the entry to reverse the previous fair value adjustment.

• 4 Record the entry for sale of Investment in Coca Cola bonds.

Answer 1

2021

December 31

Loss on investments (unrealized, OCI) .......................... 8,000
Fair value adjustment ($887,000 – $879,000)................... 8,000

2022   

January 3: Three journal entries:

1. Adjust to fair value on date of sale:

Fair Value   Adjustment Balance on December 31, 2021 $(8,000) ± Adjustment needed to update fair value   ? Balance needed on January 3, 2022 ($896,000 − $887,000)   $ 9,000

Fair value adjustment (amount necessary to reach balance of $9,000) 17,000

Gain on investments (unrealized, OCI) (to balance)..... 17,000

2. Reverse previous fair value adjustments:

Reclassification adjustment (OCI) (to balance).................. 9,000

Fair value adjustment (account balance)........................ 9,000

3. Record the sale transaction:

Cash (selling price)............................................................. 896,000

Investment in bonds (account balance)............................ 887,000

Gain on investments (NI) (to balance) 9,000