On December 1, Year 1, Axel Financial purchased $50,000 of bonds issued by Lamb Company at face value. The bonds mature in ten years. Axel’s intent was to sell the bonds soon to earn a profit on any short-term price fluctuations. The fair value of those bonds decreased by $5,000 to $45,000 on December 31, Year 1. Which of the following statements are correct with regards to this investment?

The bonds should be reported among current assets in the balance sheet at December 31, Year 1.

The bonds should be reported among current assets in the balance sheet at December 31, Year 1.

At December 31, Year 1, the $5,000 decrease in fair value should be ignored.

At December 31, Year 1, the $5,000 decrease in fair value should be ignored.

The bonds should be reported at their fair value of $45,000 in the balance sheet at December 31, Year 1.

The bonds should be reported at their fair value of $45,000 in the balance sheet at December 31, Year 1.

An unrealized holding gain in the amount of $5,000 should be included in net income in the income statement prepared for Year 1.

Answer - Bonds should be The bonds should be reported among current assets in the balance sheet at December 31, Year 1; reported at their fair value of $45,000 in the balance sheet

Bonds are purchased at $50000. Intent was to sell the bonds soon to earn a profit on any short-term price fluctuations. The fair value of those bonds decreased by $5,000 to $45,000. It should be reported as current asset, because it is an investment made and also it is sold in short time making it current asset.

But in the balance sheet it should be reported at the fair value $45000

Munali Munali · Answer 2 · 2020-01-28T17:05:31+01:00

Answer:

1. True

2. False

3. True

4. False

Explanation:

1.The first statement is True because the intention of Axel is to sell the financial asset soon to earn short term gain which qualifies as a current asset.

2.The change in fair value of the financial asset should not be ignored as per fair value method.

3.The Financial asset of Bonds should be reported at fair value which is $45000 in the Balance Sheet according to Fair Value Method

4.There is a loss of $5000 in the fair value of the financial asset. The gain or loss are not included in the Net Income until it is realized.