Question

S&L Financial buys and sells securities which it classifies as available for sale. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $775,000 and sold the bonds on January 3, 2019, for $779,500. At December 31, the bonds had a fair value of $771,500, and S&L has the intent and ability to hold the investment until fair value recovers. What pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment? Pretax amount 2018 2019 No gain/loss in earnings Gain

Answer 1

2018

The fair value had fallen below the purchase value as on December 31, 2018. The loss has to be recognized as unrealized holding gain/loss reported under "other comprehensive income".

2019

Particulars	Amount
Sales value	$850,500
Less: purchase value	845,000
Gain Loss	$5,500

Pretax Amount
2018	No Gain/loss in earnings	0
2019	Gain	$5,500

Answer 2

The first intial answer the general computation is correct but the figures are coming from a different source not the source listed (I have Answer #1 figures). It can be a bit confusing when the answer figures differ from the intial problem figures especially when you're just learning the material.

With this particular set of data it would be:

2019:

Sales Value $ 779,500

Less: Purchase Value $ 775,000

2019 Gain on Pretax Income of $ 4,500

The pretax income for 2018 is correct in Answer #1.