Question

At December 31, the Long-Term Investments (Available-for-sale securities or “AFS”) had a fair value of $180,190. The AFS Investment was originally purchased on May 1, 2017 for $160,500. CMC uses a “Fair Value Adjustment” account (an adjunct/contra account to the Investments) to mark-to-market the investment portfolio at year end. CMC’s tax rate is 21%.

What is the Adjusting Journal Entry for this?

Answer 1

Long-Term Investments A/c Dr. 19,690

To Unrealised Gain on Investmenst 19,690

(Being long-term investments revalued on the financial year ending date (180,190-160,500)

This balance of unrealised gain on investment is shown in Shareholder's equity.

For taxation purposes, we have to made a Deferred Tax Liability as gain is still not recognised and tax is payable on realisation of gain. Following Journal entry will be passed:

Profit and Loss A/c Dr. 4,135

To Deferred Tax Liability A/c 4,135

(Being deferred tax liability recognised (19,690 * 0.21 = 4,135))