# Explanation of Journal Entry journal entry is made to **report the change in fair value of an investment** as of December 31, 2021. ## Breakdown of the Entry | Date | Account | Dr | Cr | |------------|--------------------------------------|---------|--------| | 31-12-2021 | Fair Value Adjustment | $9.2 | | | | Unrealized holding gain - OCI | | $9.2 | ### Accounts Involved - **Fair Value Adjustment (Dr $9.2):** - This account is **debited** to increase the carrying amount of the investment to its new fair value. - **Unrealized Holding Gain – OCI (Cr $9.2):** - This account is **credited** to recognize the unrealized gain arising from the increase in fair value. - "OCI" stands for **Other Comprehensive Income**, meaning the gain is reported in OCI and not in net income. ### Purpose - **To record the fair value adjustment:** This entry **updates the investment's value on the balance sheet** to reflect its fair value as of year-end. - **Unrealized Gain:** Since the investment has not been sold, the gain is considered "unrealized" and is therefore reported in OCI, not as part of regular earnings. ## Summary - **Why is this done?** To comply with accounting standards (like IFRS and US GAAP) which require certain investments to be measured at fair value with changes reported in OCI until realized. - **Effect:** - Increases asset value on balance sheet. - Increases OCI (a component of equity), not net income. --- **In short:** This journal entry reflects an *increase* in the fair value of an investment, with the gain recognized in Other Comprehensive Income, not the income statement.