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27 July, 08:53

Cullumber Corporation purchased trading investment bonds for $55,000 at par. At December 31, Cullumber received annual interest of $2,200, and the fair value of the bonds was $52,500. Prepare Cullumber's 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. 27 July, 09:58
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    The Journal entries are as follows:

    (a) the purchase of the investment,

    Investment in trading securities A/c Dr. $55,000

    To cash $55,000

    (To record purchase of the investment)

    (b) the interest received,

    (i) Interest receivable A/c Dr. $2,200

    To interest on investment $2,200

    (To record the interest received)

    (ii) Cash A/c Dr. $2,200

    To Interest receivable $2,200

    (To record the interest income received)

    (c) the fair value adjustment,

    Unrealized loss - trading securities A/c Dr. $2,500

    To Investment in trading securities $2,500

    (To record the Unrealized loss when adjusted to fair value)

    Workings:

    Unrealized loss:

    = Book value of the investment - Fair value of the investment

    = $55,000 - $52,500

    = $2,500
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