Question

During 2020, Wharton purchased a bond issued by Stephenville Corporation at face value for $1,000. As of December 31, 2020, the amortized cost of the bond has not changed, but the market value of the bond has risen to $1,200. Wharton has no other investments. Wharton is attempting to decide which of the following options to choose in classifying the investment:

Option 1: Classify the investment as available-for-sale.

Option 2: Classify the investment as a trading security.

Which of the following statements concerning 2020 financial statements is true?

		Total Stockholders Equity will be lower under Option 1 than under Option 2.
		Net income will be lower under Option 1 than under Option 2.
		Net income will be higher under Option 1 than under Option 2.
		Total Stockholders’ Equity will be higher under Option 1 than under Option 2.
		None of the other answer choices is correct.

Answer 1

If the company uses option 1 that is classified investment as available for sale, then it meets the condition of amortized cost under ifrs 9. Any change in market value will not be recorded and hence net income and stockholders equity will be unchanged.

If the company uses option 2 that is classified the investment as a trading security, then fair value changes are recognised in profit and loss account. Since here market value has increased, gain of dollar 200 will be recorded and it will increase the net income. net income becomes a part of retained earning which in turn is a part of stockholders equity. Hence, both net income and stockholders equity will increase.

Hence, option 1 and option 2, both are correct.