Question
In: Accounting
S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On...
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?
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Expert Solution
| 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 |
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