Herkimer Quinnan Associates acquired $7,540,000 par value, 4%, 20-year bonds on their date of issue, January 1 of the current year. The market rate at the time of issue is 18% and interest is paid semiannually on June 30 and December 31. Quinnan uses the effective interest rate method to account for this investment. Quinnan does not intend to hold the investment until maturity nor will it actively trade the bonds. The fair value of the bonds at the end of the year of acquisition is $5,197,300. The purchase price of the investment in bonds is $1,862,265. The fair value adjustment-available-for-sale debt investment account has a debit balance of $3,299,915 at the end of the year of acquisition.

Requirement

Prepare the fair value adjustment journal entries at the end of the second and third years after the acquisition of the investment assuming that the fair value of the bonds is equal to $5,140,000 at the end of year 2 and $505,860 at the end of year three. (Round your intermediary and final answers to the nearest whole dollar. Record debits first then credits. Exclude explanations from any journal entries)

Period	Cash interest (a)	Effective interest (b)	Discount Amortization (c)	Amortized Cost (d)
0				?
1	?	?	?	?
2	?	?	?	?
3	?	?	?	?
4	?	?	?	?
5	?	?	?	?
6	?	?	?	?

Description	December 31, Year 2	December 31, Year 3
Fair value	?	?
Less: Amortized cost	?	?
Fair Value adjustment account
Balance debit (credit)	?	?
Less: Existing debit (credit) balance in the
fair value adjustment account	?	?
Unrealized gain (loss) current year	?	?

December 31, Year 2

Account	Debit	Credit
Unrealized Gain/Loss - Other Comprehensive Income	?
Fair Value Adjustment - Available-for-Sale Debt Investment		?

December 31, Year 3

Account	Debit	Credit
Unrealized Gain/Loss - Other Comprehensive Income	?
Fair Value Adjustment - Available-for-Sale Debt Investment		?