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January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale

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Answer:

Fair Value adjustment $5,000 Dr.

Unrealized holding gain-net income $5,000 Cr.

Explanation:

Common stock purchase price = $500,000

North company outstanding stock = $10,000,000

5% stock of outstanding stock purchased :

(5/100) * $10,000,000

0.05 * 10,000,000

= $500,000

Fair value of investment = $505,000

Adjustment in fair value = $505,000 - $500,000 = $5000 ( Debit)

Unrealized holding gain-net income = $505,000 - $500,000 ( Credit)

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