In: Accounting
The accounting records of Jamaican Importers, Inc., at January
1, 2018, included the following:
Assets: | ||||
Investment in IBM common shares | $ | 1,395,000 | ||
Less: Fair value adjustment | (150,000 | ) | ||
$ | 1,245,000 | |||
No changes occurred during 2018 in the investment portfolio.
Required:
Prepare appropriate adjusting entry(s) at December 31, 2018,
assuming the fair value of the IBM common shares was:
$1,187,000
$1,287,000
$1,425,000
(If no entry is required for a transaction/event, select
"No journal entry required" in the first account
field.)
The following are the appropriate adjusting entries:
1. Adjusting entry if the fair value of the IBM common shares was $1,187,000 on December 31, 2018:
Cost of Investment: $1,395,000;
Market value: $1,187,000;
Fair value loss : $208,000
Previously carried fair value loss: $150,000
Therefore, Unrealized loss = $208,000 - $150,000 = $58,000
2. Adjusting entry if the fair value of the IBM common shares was $1,287,000 on December 31, 2018
Cost of Investment: $1,395,000;
Market value: $1,287,000;
Fair value loss : $108,000
Previously carried fair value loss: $150,000
Therefore, Unrealized gain = $150,000 - $108,000 = $42,000
3. Adjusting entry if the fair value of the IBM common shares was $1,425,000 on December 31, 2018
Fair value adjustment is to be adjusted to the extent of the cost of the asset and can't be exceeded to the market price as in this case the market price is greater than the cost of investment.
Since market value is exceeding the cost, entire fair value loss
can be written off.
Hope this is helpful!!