tps://newconnect.mheducation.c ow/c t html mework S&l; Financial buys and sells

Question

tps://newconnect.mheducation.c ow/c t html mework S&l; Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2018, S&L; purchased Coca-Cola bonds at par for $745,000 and sold the bonds on January 3, 2019, for $748,500. At December 31, the bonds had a fair value of $742,500, and S&L; has the intent and ability to hold the investment until fair value recovers. What pretax amounts did S&L; include in its 2018 and 2019 net income as a result of this investment? Pretax amou 2018 2019

Explanation / Answer

Unlike for trading securities, unrealized holding gains and losses for securities available-for-sale are not included in earnings. S&L reports its $2,500 holding loss in 2018 as other comprehensive income in the statement of comprehensive income. When the fair value rises to $748,500 in 2019, the amount reported in 2019 earnings is the $3,500 gain realized by the sale.

Net unrealized holding gains and losses –OCI

PreTAx Amount 2018 No gain/loss in earnings 2019 GAIN = 3500

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