In 20X1, an investor, who has not elected the fair value option, buys shares of Company...

In 20X1, an investor, who has not elected the fair value option, buys shares of Company A for $7,500 and shares of Company B for $12,437.

By the end of 20X1, each of the investments has increased in value by $2,500.

During 20X2, the shares of Company A are sold for $10,945.

The investor then buys shares of Company C for $15,923.

At the end of 20X2, the shares of Company B are worth $12,962 whereas the shares of Company C are worth $16,398.

If all of these investments are viewed as available for sale securities, what is the total amount reported as Accumulated Other Comprehensive Income on the balance sheet at the end of 20X2?

Expert Solution

Available for sale security are the financial assets, purchased with the motive of holding for long term or selling before the maturity. The accounting standards such as GAAP or IFRS requires the investment assets to be classified as Held-to-Maturity, Held for trading, or Available for sale.

The available for sale security are required to be reported at fair value, any change in the fair value (or unrealized gain or losses) are recorded through other comprehensive income and included in accumulated other comprehensive income in the equity side of the balance sheet.

Considering the above:

The investor bought shares of Company A for $7,500 and shares of Company B for $12,437 in 20X1.

By end of 20X1, each of the investments has increased in value by $2,500.

Therefore, the total amount to be recorded through other comprehensive income and reported as Accumulated Other Comprehensive Income shall be $5,000 ($2.500 *2).

During the year 20X2, the share of Company A are sold for $10,945 of which the cost is $7500, which brings the profit to $3,445, which will require the Accumulated Other Comprehensive Income to be reversed by $2,500 and shall be included in the Profit & Loss A/c.

Further, The investor buys shares of Company C for $15,923, which is valued at $16,398 at the end of the year 20X2.

Further, the shares of the Company B are valued at $12,962 at the end of the year 20X2.

Therefore the Amount to be reported as Accumulated Other Comprehensive Income shall be $1,000 [$2500 OB + ($16,398-15,923) + (12,962-14,937)].

ekkarill92 answered 1 year ago

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