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 $890,000 and sold the bonds on January 3, 2019, for $897,000. At December 31, the bonds had a fair value of $887,500, 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?

Answer 1

The pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment is $2,500 loss and $9,500 profit.

Step-by-step explanation:

The computation of the pretax amounts for each year is shown below:

For the year 2018

Pretax amount = Purchase value of coca-cola bonds - fair value

= $890,000 - $887,500

= $2,500

The $2,500 would be loss as fair value is less than its purchase price

For year 2019

Pretax amount = sale value of coca-cola bonds - fair value

= $897,000 - $887,500

= $9,500

The $9,500 would be profit as sale value is more than its fair value.