Question

1. Katy Company purchased a bond issued by Zenith Company. The bond was purchased at its face amount of $1,000,000. Katy’s management informs you, the corporate accountant, that it intends to sell the bond on the market as soon as market rates go down that a profit may be earned on the bond. Accordingly, in accounting for this bond, which of the following is correct

a. The bond will be recorded on the balance sheet at its carrying value

b. Unrealized holding losses on the bond will affect net income

c. Unrealized holding gains on the bond will affect other comprehensive income

d. The bond will be accounted for under the equity method of accounting because it will be sold soon.

Answer 1

Answer:- c. Unrealized holding gains on the bond will affect other comprehensive income

Reason:- Given that, Katy Company intends to sell the bond on the market as soon as market rates go down that a profit may be earned on the bond. Thus this is an investment in Trading securities. So the bond will be reported at fairvalue. Any changes in value of these investments are recognised as unrealized gain or loss under shareholders equity section (ie. other comprehensive income). On sale of these investment, the unrealized gain/loss which is now realized is transferred to income statement.