Question

S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2016, S&L purchased Coca-Cola common shares for $805,000 and sold the shares on January 3, 2017, for $809,000. At December 31, the shares had a fair value of $800,500. These securities were classified as Trading Securities.

On December 27, 2016, S&L purchased Coca-Cola common shares for $730,000 and sold the shares on January 3, 2017, for $733,000.

At December 31, the shares had a fair value of $728,000. These securities were classified as Available-for-Sale securities. What amount should S&L include in its 2016 and 2017 earnings as a result of this investment?

Answer 1

a) Trading Securities
Date	General Journal	Debit	Credit
December 27, 2016	Investment in Coca-Cola shares	$805,000.00
	Cash		$805,000.00
December 31, 2016	Net unrealized holding gains and losses – I/S	$4,500.00
	Fair Value adjustment ($805,000 – 800,500)		$4,500.00
January 03, 2017	Cash	$809,000.00
	Gain on sale of investment		$4,000.00
	Coca-Cola shares (account balance		$805,000.00
December 31, 2017	Fair Value adjustment (account balance)	$4,500.00
	Net unrealized holding gains and losses – I/S		$4,500.00
Pretax Amount earnings
2016
Earnings	$4,500.00
2017	$8,500.00
Earnings ($809,000 - 800,500)
Available-for-Sale securities
Date	General Journal	Debit	Credit
December 27, 2016	Investment in Coca-Cola shares	$730,000.00
	Cash		$730,000.00
December 31, 2016	Net unrealized holding gains and losses – OCI	$2,000.00
	Fair Value adjustment AFS ($730,000 – 728,000)		$2,000.00
January 03, 2017	Cash	$733,000.00
	Gain on sale of investment		$3,000.00
	Investment in AFS Securities		$730,000.00
December 31, 2017	Fair Value adjustment (account balance)	$2,000.00
	Net unrealized holding gains and losses – OCI		$2,000.00
Pretax Amount earnings
The unrealized holding gains and losses for securities available-for-sale are not included in earnings it will report as Other comprehensive income in the statement of comprehensive income
2016
Earnings	$0.00
2017
Earnings ($733,000 - 728,000)	$3,000.00