Question

If the investment described in the previous question had been classified as available-for-sale, what effect would the investment have on Level's 2018 financial statements? (fair value of those bonds increased by $4 million. Interest was received of $3 million)

Total assets increased by $7 million.
Total assets increased by $3 million.
Net income increased by $7 million.
Shareholders' equity increased by $1 million.

Answer 1

If the investment had been classified as available-for-sale, it would increase total assets by $7 million, have no direct effect on net income, and increase shareholders' equity by $1 million. Option D

Step-by-step explanation:

If the investment described in the previous question had been classified as available-for-sale, it would have an impact on Level's 2018 financial statements as follows:

1. Total assets would increase by $7 million, reflecting the increase in the fair value of the bonds by $4 million and the interest received of $3 million.

2. Net income would not be affected directly by the change in classification. However, the increase in fair value would be recognized as unrealized gain in other comprehensive income.

3. Shareholders' equity would increase by $1 million, representing the increase in fair value recognized in other comprehensive income. Option D