Q. 5SE_3 - Horngren'S Financial And Managerial Accounting

Question

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements 

What was the net effect of the investment on Bell’s net income for the year ended December 31, 2018?

Step-by-Step Solution

Answer

The net income of the business entity will increase by $2,800.

Step 1: Definition of Fair Value Adjustments

The adjustments made for reflecting the increase or decrease in the asset’s fair value are known as fair value adjustments. These adjustments lead to the generation of unrealized holding gains and losses.

Step 2: Effect of investment on net income of the year

Net income for the year ending 31 Dec 2018 has been increased due to an increase in the fair value of the bonds. The increase in net income is equal to $2,800.