Question

P17-10 (Gain on Sale of Investments and Comprehensive Income)
On January 1, 2014, Acker Inc. had the following balance sheet:
Acker Inc.
Balance Sheet
As of January 1, 2014
Assets						Equity
Cash				$          50,000		Common Stock				$        260,000
Equity Investments (available-for-sale)				240,000		Accumulated other comprehensive income				30,000
Total				$        290,000		Total				$        290,000
The accumulated other comprehensive income related to unrealized holding gains on available-for-sale securities. The fair value of Acker Inc.'s available-for-sale securities at December 31, 2014, was $190,000; it's cost was $140,000. No securities were purchased during the year. Acker Inc.'s Income Statement for 2014 was as follows: (Ignore income taxes.)
											Acker Inc.
Income Statement
For the Year Ended December 31, 2014
				Dividend Revenue			$    5,000
				Gain on sale of investments			30,000
				Net Income			$ 35,000
Instructions
(Assume all transactions during the year were for cash.)
a) Prepare the journal entry to record the sale of the available-for-sale securities in 2014.
b) Prepare a statement of comprehensive income for 2014.
c) Prepare a balance sheet as of December 31, 2014.

Answer 1

Solution:

From the given data we need to find the answers for the given requirements,

Answer for (a):

January 1, 2014

Fair value of available for sale securities ..........................$240,000

Less: Accumulated other comprehensive income.............. (30,000)

Cost basis........................... $210,000  

December 31, 2014

Fair value of available for sale securities........................ .$190,000

Less: Cost basis .................................. 140,000

Accumulated other comprehensive income ........ $50,000

Available for sale securities = $210,000 - $140,000

= $70,000

Answer for (b);

  ACKER INC.

Statement of comprehensive income   

For the year ended december 31,2014

Account details		Amount ($)
Net income		35,000
Other comprehensive income;
Total holding gains araising during the year	50,000
Less: Reclassification adjustment for gains included in income	30,000	20,000
Comprehensive income		55,000
Accumulated other comprehensive income 31/12/2014		50,000
Accumulated other comprehensive income 1/1/2014		30,000
Increased in unrealized holding gain		20,000
Realized holding gain		30,000
Total holding gains arising during period		$50,000

Answer for (c):

  ACKER INC Balance sheet as on 31/12/2014

ASSETS	AMOUNT ($)	STOCKHOLDER'S EQUITY	AMOUNT ($)
Cash	155,000	Common stock	260,000
Available for sale securities	190,000	Retained earnings	35,000
		accumulated other comprehensive income	50,000
Total assets	$345,000	Total equity	$345,000

  

Working note:

Cash = beginning balance + dividend revenue + cash proceeds on sale

= 50000 + 5000 + 100000

= 155,000