Question

S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2018, S&L purchased Coca-Cola bonds for $875,000 and sold the the bonds on January 3, 2019, for $881,500. At December 31, the bonds had a fair value of $873,000. What pretax amounts did S&L include in its 2018 and 2019 net income as a result of this investment (ignoring interest)?

Answer 1

Answer:

2018-unrealized loss of $2,000

2019 -gain on sale of investments of $8,500

Explanation:

As at December 31st 2018,the amount S& L would include in its pretax income as a result of the bond investment is the difference between the purchase of the bond of $875,000 and the fair value of the investment at year end of $873,000,effectively that gives an unrealized loss of $2,000($873,000-$875,000)

However, in the year 2019 ,the amount to be included in pretax amount in respect of the bond is the difference between the fair value in 2018 and the proceeds from the sale of investment of $881,500 i.e a gain of $8,500($881,500-$873,000)