Question

Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. On the date of sale, Markus should recognize a realized gain of _____ in net income. (Assume the debt investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed.)

Answer 1

Markus should recognize a realized gain of $2,000 in net income on the date of sale.

Step-by-step explanation:

Markus should recognize a realized gain of $2,000 in net income on the date of sale.

The realized gain is calculated by subtracting the original cost of the investment from the sale price:

Realized Gain = Sale Price - Original Cost

Realized Gain = $20,000 - $18,000

Realized Gain = $2,000

This realized gain is recognized in net income because the available-for-sale debt investment is classified as a non-trading investment. When a non-trading investment is sold, any unrealized holding gains or losses are reversed and recognized in net income.

Therefore, the realized gain of $2,000 should be recognized in net income.