Question

21. During its first year of operation, the Fast and Fancy Company purchased short-term investments for a total cost of $89,700. At the end of its first year of operation, the company needs to prepare financial statements. The cost of its portfolio is still $89,700 at year's end, but the market value of the portfolio has declined to $85,000. No entry has been made up to this time to reflect any difference in the cost and market values of the portfolio. The adjusting entry required to reflect this information on the soon-to- be-prepared financial statements would be A. Decline in Value of Short-Term Investments $4,700 Allowance for Decline in Value of Short-Term Investments $4,700 B. Decline in Value of Short-Term Investments $85,000 Allowance for Decline in Value of Short-Term Investments $85,000 C. Allowance for Decline in Value of Short-Term Investments $ 4,700 Decline in Value of Short-Term Investments $4,700 D. None of the above because no entry would be required.

Answer 1

Solution: The correct option is “ C” i.e as below

Allowance for decline in value of short term investments( Debit)	$ 4700
Decline in value of short term investments(Credit)		$ 4700

When market value of the short term investments is less than their cost, Unrealized holding loss account is debited and the short term investment account is credited. is presented in the balance sheet as per a valuation principle called as mark-to-market. As per this principle the short term investment is reported in the balance sheet at its current market value on the balance sheet date.