11BE - Intermediate Accounting (Kieso)

Question

On January 1, 2017, Richards Inc. had cash and common stock of \(60,000. At that date, the company had no other asset, liability, or equity balances. On January 2, 2017, it purchased for cash \)20,000 of debt securities that it classified as available-for-sale. It received interest of \(3,000 during the year on these securities. In addition, it has an unrealized holding gain on these securities of \)4,000 net of tax. Determine the following amounts for 2017: (a) net income, (b) comprehensive income, (c) other comprehensive income, and (d) accumulated other comprehensive income (end of 2017).

Step-by-Step Solution

Answer

(a) $3,000

(b) $7,000

(c) $4,000

(d) $4,000

Meaning of Common Stock

Common stock is considered an important element of a corporation. It is reported in the equity section of the balance sheet, which shows the ownership of stakeholders in the company.

Calculation of Net Income

The interest amount received is the net income of the securities. So the net income is $3,000.

Calculation of comprehensive income

Net income	$3,000
Unrealized holding gain (net of tax)	$4,000
Comprehensive income	$7,000

$\begin{array}{rcl}\mathrm{Comprehensive} \mathrm{Income}& =& \mathrm{Net} \mathrm{Income}+\mathrm{Unrealised} \mathrm{holding} \mathrm{gain}\\ & =& \$3,000+\$4,000\\ & =& \$7,0000\end{array}$

Calculation of Other Comprehensive Income

Other comprehensive income is the unrealized holding gain of $4,000.

Calculation of accumulated other comprehensive income

The accumulated other comprehensive income (Unrealized holding Gain) at the end of 2017 is $4,000.