SunTrust Banks owns a large block of Coca-Cola Company (Coke) common stock that it has held for many years. SunTrust indicates in a note to its financial statements that all equity securities held by the bank, including its investment in Coke stock, are classified as available for sale. A recent annual report of SunTrust reports the following information for its Coke investment (amounts in thousands):
Coke common stock investment, market value on December 31, 2006 ....$2,324,826
Coke common stock investment, market value on December 31, 2005 ....$1,945,622
Net income for 2006 ............................................................... $2,109,742
Required:-
a. Calculate the effect of the change in the market value of SunTrust's investment in Coke's common stock on SunTrust's 2006
(1) Net income and
(2) Shareholders' equity. Ignore taxes.
b. How would your answer to Part a differ if SunTrust classified its investment in Coke's common stock as a trading security?
c. Does the value reported on SunTrust's balance sheet for the investment in Coke's stock differ depending on the firm's reason for holding the stock (that is, whether it is classified as available for sale versus trading by management)? Explain.