Universal Corporation buys and sells debt securities which it classifies as avai
ID: 2332955 • Letter: U
Question
Universal Corporation buys and sells debt securities which it classifies as available-for-sale. The company’s fiscal year ends on December 31. On December 27, 2018, Universal purchased Beaver bonds at par for $500,000 and sold the bonds on January 3, 2019 for $540,000. At December 31, the bonds had a fair value of $510,000. What pretax amounts did Universal include in its 2018 and 2019 net income as a result of this investment?
2018 net income: $10,000; 2019 net income: $(10,000).
2018 net income: $10,000; 2019 net income: $40,000.
2018 net income: $0; 2019 net income: $40,000.
2018 net income: $0; 2019 net income: $30,000.
Explanation / Answer
If the fair value of Available-for sale securities changes, the gain or loss shall be treated as unrealizad until actually sold. These are excluded from earnings, therefore
2018 net income will be $0, 2019 net income will be $40,000.
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