Question

Evans Company owns 450 bonds of Frazier Company classified as available-for-sale. During 2018, the fair value of those bonds increased by $9 million. What effect did this increase have on Evans' 2018 financial statements?

Net assets increased.
Total assets decreased.
Net income increased.
Shareholders' equity decreased.

Answer 1

The increase of $9 million in the fair value of the available-for-sale bonds owned by Evans Company would result in an increase in both net assets and shareholders' equity on the financial statements, not affecting net income.

Step-by-step explanation:

When Evans Company's fair value of bonds classified as available-for-sale increased by $9 million during 2018, this increase affected their financial statements by increasing net assets and shareholders' equity.

The increase in fair value of available-for-sale securities does not affect net income since unrealized gains and losses for these securities are reported as other comprehensive income and are included in the shareholders' equity section of the balance sheet, not on the income statement.

Thus, the net income does not increase due to this change in fair value, and total assets indeed increase, contrary to decreasing.