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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 $700,000 and sold the bonds on January 3, 2019, for $702,000. On December 31, the bonds had a fair value of $699,000, 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?

Answer :

Answer:

2018: No pretax income or loss

2019: Income of $2,000.

Explanation:

Given that,

On December 27, 2018

Purchased Coca-Cola bonds at par = $700,000

sold the bonds on January 3, 2019 = $702,000

On December 31, the bonds had a fair value = $699,000

In 2018:

Fair value is less than the purchase value of bonds on 31st December. Therefore, the loss has to be reported under the other comprehensive income.

Hence, there is no income or loss in the year 2018.

In 2019:

Gain/loss on the sale of bonds:

= Sale value - Purchase value

= $702,000 - $700,000

= $2,000

Therefore, the amount of pretax earnings in the year 2019  is $2,000.

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