Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1

Question

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate 7%. Using the effective interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1770 and $1830 respectively. At December 31, 2011, the fair value of the Ritter, Inc. bonds was $530,000. What should Landis Co. report as other comprehensive income and as a separate component of stockholders' equity?

9,210
3,600
No entry should be made
12,810

Explanation / Answer

520,790-1,770-1,830=517,190 (carrying amount -amortized cost) 530,000-517,190=12,810 unrelized holding gain, it reports this gain as other comprehensive income and as a separate component of stockholders' equity. Securities Fair Value Adjustment(Avalable for sale) 12810 debit Unrealized Holding Gain-Equity 12810 credit

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