On December 31 of the prior year,Anna Company owned 1,000 shares of Egert Company common stock with a cost of $12,000 and a fair value of $11,000.This is the only investment held by Anna.On June 1 of the current year,Anna sells 500 of the Egert company shares for $7,200.On December 31 of the current year,the fair value of Egert Company common stock was $11 per share.Anna made no other purchases or sales of investments during the current year.The adjusting entry to record the fair value of the investments on December 31 is:
A)Debit Unrealized Gain - Income,$500; Credit Fair Value Adjustment - Stock,$500.
B)Debit Fair Value Adjustment - Stock,$500; Credit Unrealized Gain - Income,$500.
C)Debit Fair Value Adjustment - Stock,$1,500; Credit Unrealized Gain - Equity,$1,500.
D)Debit Fair Value Adjustment - Stock,$1,500; Credit Unrealized Gain - Income,$1,500.
E)No adjusting entry required.

Question

Quizplus · Accepted Answer

The fair value adjustment is needed to reflect the change in the fair value of the remaining investment in Egert Company common stock. Initially, Anna Company owned 1,000 shares with a cost of $12,000 and a fair value of $11,000. After selling 500 shares, 500 shares remained. The fair value at the end of the year is $11 per share, making the fair value of the remaining shares $5,500 ($11 * 500 shares). The original cost of these remaining shares would be $6,000 (half of the original $12,000 cost, assuming a straight-line allocation). The adjustment needed is to decrease the carrying amount to the fair value, which requires an increase in the Fair Value Adjustment account by $1,500 ($6,000 cost - $5,500 fair value) and recognizing an unrealized gain of $1,500 in income.

On December 31 of the Prior Year,Anna Company Owned 1,000