Q. 6SE_3 - Horngren'S Financial And Managerial Accounting

Question

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term. 

Requirements 

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

Step-by-Step Solution

Answer

Unrealized holding loss of available for sale securities will not affect the business’s net income.

Step 1: Definition of Available for Sale Investment

The investments purchased for generating gain over a short period within one year are known to be available for sale investment. These investments are held for more time as compared to trading investments.

Step 2: Effect of investment on net income

Net income will not be affected by the unrealized holding loss because such loss will be reported as a deductible item on the balance sheet under the stockholder equity section as other comprehensive income. Such loss will be adjusted against the retained earnings in the equity section.