Question

On January 12, Henderson Corporation purchased bonds of Honeycutt Corporation for $73 million and classified the securities as available-for-sale. At the close of the same year, the fair value of the securities is $81 million. Henderson Corporation should report:

A gain of $8 million on the income statement.
An increase in shareholders' equity of $8 million.
An investment of $73 million.
None of the choices are correct.

Answer 1

Henderson Corporation should report an increase in shareholders' equity of $8 million, reflecting an unrealized gain in the fair value of available-for-sale securities.

Step-by-step explanation:

When Henderson Corporation purchased Honeycutt Corporation bonds and classified them as available-for-sale, any unrealized gains or losses due to changes in fair value are reported as a separate component of shareholders' equity, not on the income statement.

At year-end, with the fair value of the bonds at $81 million which is higher than the purchase price of $73 million, Henderson should report:

• An increase in shareholders' equity of $8 million.

This reflects an unrealized gain in the fair value of the securities.