On March 15,Alan Company purchased bonds of Cameo Corp.for $35,000.The investment is classified as available-for-sale securities.This is the company's first and only investment in available-for-sale securities.On June 30,the bonds had a fair value of $34,000.Alan should do which of the following:
A)Record a debit to the Fair Value Adjustment-AFS account.
B)Record a debit to the Unrealized Loss−Equity account.
C)Record a credit to the Unrealized Loss−Equity account.
D)Record a debit to the Unrealized Loss−Income account.
E)Record a credit to the Unrealized Gain−Income account.

Question

Quizplus · Accepted Answer

When the fair value of available-for-sale securities decreases below their cost, an unrealized loss occurs. Alan Company should record a debit to the Unrealized Loss-Equity account to reflect the decrease in fair value. Option A is incorrect because the Fair Value Adjustment-AFS account is used to record the fair value adjustment when available-for-sale securities are initially recorded, not for subsequent adjustments in fair value. Option C is incorrect because a credit entry would increase equity, which is incorrect in this situation. Option D is incorrect because the Unrealized Loss-Income account is used for trading securities and not available-for-sale securities. Option E is incorrect because the Unrealized Gain-Income account is used to record any increase in fair value, which is not the case here as the fair value has decreased.

On March 15,Alan Company Purchased Bonds of Cameo Corp