To create the adjusting entry for Jerome, Inc.'s trading securities portfolio, follow these steps:
1. Calculate the unrealized loss:
- The initial cost of the trading securities portfolio is \[tex]$3,000.
- The fair value at the end of the year is \$[/tex]2,800.
- The unrealized loss is the difference between the initial cost and the fair value:
[tex]\[
\text{Unrealized loss} = \text{Initial Cost} - \text{Fair Value} = \$3,000 - \$2,800 = \$200
\][/tex]
2. Prepare the journal entry:
- To adjust for the unrealized loss on trading securities, we need to debit the "Unrealized Loss on Trading Securities" account.
- We also need to credit the "Valuation Allowance for Trading Securities" account to reflect the decrease in the portfolio's value.
Here is the completed journal entry:
[tex]\[
\begin{tabular}{|c|c|r|r|}
\hline
\text{Date} & \text{General Journal} & \text{Debit} & \text{Credit} \\
\hline
\text{Dec. 31} & \text{Unrealized Loss on Trading Securities} & \$200 & \\
\hline
& \text{Valuation Allowance for Trading Securities} & & \$200 \\
\hline
\end{tabular}
\][/tex]
Explanation:
- Unrealized Loss on Trading Securities (Debit \[tex]$200): This account is used to record the loss that has occurred due to the decrease in the fair value of the trading securities portfolio.
- Valuation Allowance for Trading Securities (Credit \$[/tex]200): This account is used to adjust the book value of the trading securities portfolio to its fair value.
This entry ensures that the financial statements of Jerome, Inc. reflect the correct fair value of its trading securities portfolio at year-end.
