Question

S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2021, S&L purchased Coca-Cola bonds at par for $745,000 and sold the bonds on January 3, 2022, for $748,500. At December 31, the bonds had a fair value of $742,500. What pretax amounts did S&L include in its 2021 and 2022 net income as a result of this investment (ignoring interest)? (Enter all amounts as positive values.) Pretax Amount 2021 2022 Gain Loss No gain/loss in earnings

Answer 1

1	Computation of pre-tax amount
	Year 2021
	Purchase price of bond = 745,000
	Fair value on 31st Dec   = 742,500
	Selling Price of bond      = 748,500
	As fair value is less than the purchase price, therefore there is unrealised holdig loss
	Unrealised holding loss = Purchase price - Fair value
	Unrealised holding loss = 745,000-742,500
	Unrealised holding loss = 2,500
	Year 2022
	Pretax amount included in 2022
	In 2022, the sale value is higher than fair value, therefore there is unrealised holding gain
	Unrealised holding Gain = Selling price - Fair value
	Unrealised holding Gain = 748,500-742,500
	Unrealised holding Gain = 6000
2	Year 2021
	Purchase price of bond = 790,000
	Fair value on 31st Dec   = 786,000
	Selling Price of bond      = 795,000
	As fair value is less than the purchase price, therefore there is unrealised holdig loss
	Unrealised holding loss = Purchase price - Fair value
	Unrealised holding loss = 790,000-786,000
	Unrealised holding loss = 4,000
	Year 2022
	Pretax amount included in 2022
	In 2022, the sale value is higher than fair value, therefore there is unrealised holding gain
	Unrealised holding Gain = Selling price - Fair value
	Unrealised holding Gain = 795,000-786,000
	Unrealised holding Gain = 9000
3	Since Adam is not holding the enough to exercise significant influence, therefore appropriate reporting category should be fair value through net income
	Fair value through net income = No. of shares held X Market value as at 31st Dec 2022
	Fair value through net income = 57000 X 101
	Fair value through net income = $ 5,757,000
4	As Kim holds 40% in Phelps Inc.
	Equity method is used if significant influence above 20% but less than 50% in the investee company
	Amount of investment in Phelps Limited	Amount in Million
	Amount paid for shares of Phelps Limited	15.00
	Add : Share in Income	-
	($ 2 Million * 40%)	0.80
	Less : Payment of cash dividend	-
	($ 1.3 Million * 40%)	(0.52)
		15.28
	Note : The difference of $3 million is due to land appreciation. It will go to the land account