Question

  At the beginning of 2018, Subway purchased an investment in a bond for $100,000. The fair value of the bond at the end of 2018 was $105,000. The bond was sold in 2019 for $120,000.

If the bond investment was classified as a trading security, how much of the $20,000 gain on the investment would be included in:

                                    2018 net income?                                           2019 net income?

If the bond investment was classified as an available-for-sale security, how much of the $20,000 gain on the investment would be included in:

                                    2018 net income?                                           2019 net income?

Answer 1

At the beginning of 2018, Subway purchased an investment in a bond for $100,000. The fair value of the bond at the end of 2018 was $105,000. The bond was sold in 2019 for $120,000.

If the bond investment was classified as a trading security

No gain should be included in 2018 income. Gain of $20,000 should be included in the income of 2019. Securities held primarily for sale in the near term to generate income on short-term price differences are known as trading securities. Any gain on sale of trading securities is recognized in the year of sale.

If the bond investment was classified as an available-for-sale security

$5,000 gain should be included in the income of 2018 and remaining $15,000 should be included in the income of 2019. In the available-for-sale securities, unrealized gains and losses are recorded on the income statement of the current year. Purchase price of bond in 2018 was $100,000 and it's fair value in 2018 was $105,000, hence unrealized gain of $5,000 should be recorded in the income of 2018. And $15,000 realized gain should be recorded in the year of sale i.e. 2019