Question

Company A has the following portfolio of Available for sale securities at 12/31/17:

Security Cost Fair Value

ABC Inc. Bonds $35,000 $36,000

XYZ Corp Bonds $25,000 $28,000

DEF Co. Bonds $20,000 $21,000

PQR Inc. Bonds $20,000 $22,000

All these investments were purchased in 2017. In 2018, Company A sold the PQR Inc. bonds for $26,000. The remaining investments were still held at 12/31/18 and had the following fair values: ABC bonds $34,000, XYZ Corp bonds $29,000 and DEF Co. bonds $20,500. Company A had a tax rate of 25% for both 2017 and 2018.

1. For these securities, what will be the net effect on 2017 other comprehensive income (specify increase or decrease)

2. What will be the net effect of the reclassification adjustment reported in 2018's other comprehensive income? Will it increase or decrease the other comprehensive income for the year?

3. For these securities, what will be the net effect on 2018 other comprehensive income? (specify increase or decrease)

Based on the above information, what will be the balance in the accumulated other comprehensive income account on the 12/31/18 balance sheet?

Answer 1

1) Available for sale security	Other Comprehensive Income
ABC Inc. Bonds	$     1,000
XYZ Corp Bonds	$     3,000
DEF Co. Bonds	$     1,000
PQR Inc. Bonds	$     2,000
Increase	$     7,000

2) It will decrease the other comprehensive income by $ 2000.

Available for sale security	Other Comprehensive Income
ABC Inc. Bonds	$                   (2,000)
XYZ Corp Bonds	$                    1,000
DEF Co. Bonds	$                      (500)
PQR Inc. Bonds
Increase/ ( Decrease)	$                   (1,500)

Balance in accumulated other comprehensive income = $7000-$2000-$1500= $3500