A debt investment classified as trading securities is purchased for $73,500. At year end, when the fair value of the debt is $65,000, the adjusting entry includes a
A) credit to Debt Investments.
B) debit to Loss on Sale of Debt Investment.
C) credit to Fair Value-Adjustment-Trading.
D) credit to Unrealized Loss-Income.

Question

Quizplus · Accepted Answer

Trading securities are those purchased with the intention of selling them in the short term in order to generate profits from price changes. Therefore, when the fair value of a trading security decreases, an adjusting entry is necessary to reflect this change in value. The entry includes a credit to the Fair Value-Adjustment-Trading account to decrease the carrying value of the investment to its fair value at the end of the reporting period. Choice A is incorrect because a credit to Debt Investments would increase the carrying value of the investment, which is not appropriate in this situation. Choice B is incorrect because a loss on the sale of the investment has not occurred, and Choice D is incorrect because Unrealized Loss-Income is not a valid account.

A Debt Investment Classified as Trading Securities Is Purchased for $73,500