Answer:
(a) the purchase of the investment
Dr. Investment in trading security $55,000
Cr. Cash $55,000
(b) the interest receive
Dr. Interest receivable $2,200
Cr. Interest on Investment (income) $2,200
Dr. Cash $2,200
Cr. Interest receivable $2,200
(c) the fair value adjustment
Dr. Unrealized Loss $2,500
Cr. Investment in trading security $2,500
Explanation:
Trading Investment Bonds are recorded as assets and these are reported at fair value. Any gain or loss arising from the fair value adjustment will be recorded. Fair value adjustment should be made at end of each reporting period and when a significant difference arose. Gain from the fair value adjustment will increase the value of Investment in trading security and loss will decrease the value.
Unrealized gain = Current Book value of Investment - Fair value
Unrealized gain = $55,000 - $52,500
Unrealized gain = $2,500
