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28 December, 13:25

Indigo Corporation purchased trading investment bonds for $55,000 at par. At December 31, Indigo received annual interest of $2,200, and the fair value of the bonds was $52,500. Prepare Indigo' journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

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  1. 28 December, 13:26
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    (a) the purchase of the investment

    Dr. Investment in trading security $55,000

    Cr. Cash $55,000

    (b) the interest receive

    Dr. Interest receivable $2,200

    Cr. Interest on Investment (income) $2,200

    Dr. Cash $2,200

    Cr. Interest receivable $2,200

    (c) the fair value adjustment

    Dr. Unrealized Loss $2,500

    Cr. Investment in trading security $2,500

    Explanation:

    Trading Investment Bonds are recorded as assets and these are reported at fair value. Any gain or loss arising from the fair value adjustment will be recorded. Fair value adjustment should be made at end of each reporting period and when a significant difference arose. Gain from the fair value adjustment will increase the value of Investment in trading security and loss will decrease the value.

    Unrealized gain = Current Book value of Investment - Fair value

    Unrealized gain = $55,000 - $52,500

    Unrealized gain = $2,500
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Home » Business » Indigo Corporation purchased trading investment bonds for $55,000 at par. At December 31, Indigo received annual interest of $2,200, and the fair value of the bonds was $52,500.
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