Question

BE 12-2 Trading securities LO12-30 S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000. What pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment (ignoring interest)?

Answer 1

Answer:

If investments are made for a period less than 1 year then they are considered as Current investments.

On the Reporting date,the current investments are valued at Cost of the investment or Fair Value of the investment, Whichever is Lower. Accordingly the net income is computed.

Here S&L Financial company purchased the bonds of Coca-Cola for $875,000 on 27 December 2018. Hence the cost of investment is $875,000

On 31 December 2018, the fair value of above purchased bonds is $873,000.

Therefore, the Bonds should be valued at $873,000 (Lower among cost and fair value).

Net Income = Closing value as per books - Cost of Investment

= $873,000 - $875,000

= ($2,000)

So, as on 31 December 2018 the net income is negative i.e. Loss of $2,000

On 3 January 2019,S&L Financial company sold those Bonds for $880,000.

Closing value as per books is $873,000.

Net Income = Sale Proceeds - Closing value as per books

= $880,000 - $873,000

= $7,000

So, for the year 2019 $7,000 should be recorded as net income (profit).