Question

Yale Co. purchased a bond on October 4 of the current year for $ 45, 000 and classified it as available-for-sale. The market value of the investment at year-end is $ 42, 000. What value will be reported in net income for the adjustment, if any?

A. $42, 000
B. $0
C. $( 3,000 )
D. Not enough information is given to determine the amount included in net income.

Answer 1

Option (C), The $(3,000) unrealized loss on the available-for-sale bond purchased by Yale Co. will be reported in other comprehensive income, not in the net income.

Step-by-step explanation:

When Yale Co. purchased a bond that is classified as available-for-sale, any unrealized gains or losses are not reported in net income but are reported in other comprehensive income, which is a section of equity. The related adjustment for the change in market value is recognized as other comprehensive income (loss) on the balance sheet and does not affect the net income.

Therefore, given the bond's market value decreased from $45,000 to $42,000, the loss of $(3,000) would be recognized in other comprehensive income and will not be reported in net income.