Question

S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2021, S&L purchased Coca-Cola bonds at par for $860,000 and sold the bonds on January 3, 2022, for $866,000. At December 31, the bonds had a fair value of $858,500. What pretax amounts did S&L include in its 2021 and 2022 net income as a result of this investment (ignoring interest)?

Answer 1

Because these bonds are classified as trading securities they must be treated as follows:

Pretax Amount

2021 Loss ($1,500) Unrealized but recorded in NI

2022 Gain $7,500 Once sold gains go to Balance Sheet

Answer 2

Net income in year 2021 = $0

Net income in year 2022 = $6,000

Explanation:

Given:

Purchased bonds(2021) = $860,000

Sold bonds (2022) = $866,000

Fair market value = $858,500

Computation:

A. Net income in 2021

The fair market value of the bond is less than the purchase price of the bond, that is why we can say that no profit has been received in the year 2021

Net income = $0

B. Net income in 2022

Net income = Sold bonds - Purchased bonds

Net income = $866,000 - $860,000

Net income = $6,000