Question 3.

a. Lance Brothers Enterprises acquired $500,000 of 2% bonds, dated July 1, on July 1, 2016, as a long-term investment. Management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 3% for bonds of similar risk and maturity. Lance Brothers paid $420,000 for the investment in bonds and will receive interest semiannually on June 30 and December 31.

Prepare the journal entries (a) to record Lance Brothers investment in the bonds on July 1, 2016, and (b) to record interest on December 31, 2016, at the effective (market) rate. _________________________________________________________________________________

b. S&L Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2016, S&L purchased Coca-Cola common shares for $860,000 and sold the shares on January 3, 2017, for $866,000. At December 31, the shares had a fair value of $858,500, and S&L has the intent and ability to hold the investment until fair value recovers. What pretax amounts did S&L include in its 2016 and 2017 earnings as a result of this investment? _________________________________________________________________________________ c. S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2016, S&L purchased Coca-Cola common shares for $760,000 and sold the shares on January 3, 2017, for $764,000. At December 31, the shares had a fair value of $757,000.

What pretax amounts did S&L include in its 2016 and 2017 earnings as a result of this investment?