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At December 31, 2017, the available-for-sale debt portfolio for Pearl, Inc. is as follows. ...

Question:

At December 31, 2017, the available-for-sale debt portfolio for Pearl, Inc. is as follows.

Security Cost Fair Value Unrealized Gain (Loss)
A $18,375 $15,750 $(2,625)
B 13,125 14,700 1,575
C 24,150 26,775 2,625
Total $55,650 $57,225 1,575
Previous fair value adjustment balance-Dr. 420
Fair value adjustment-Dr. $1,155

On January 20, 2018, Pearl, Inc. sold security A for $15,855. The sale proceeds are net of brokerage fees.

Pearlinc. reports net income in 2017 of $126,000 and in 2018 of $147,000. Total holding gains (including any realized holding gain or loss) equal $42,000 in 2018.

a. Prepare a statement of comprehensive income for 2017, starting with net income.

b. Prepare a statement of comprehensive income for 2018, starting with net income.

Answer and Explanation:


An available for sale security is an investment that the investor anticipates holding for a certain time but selling before its maturity date if liquidity is needed. The security is recorded at fair value on a companies balance sheet. Changes in fair value are reported as unrealized gains or losses on a company's equity section of the balance sheet under other comprehensive income. When an available for sale security is sold the unrealized gain or loss is reversed from the balance sheet and becomes a realized gain or loss which is reported on the balance sheet of the company through the income statement.


A.


Pearl, Inc.

Statement of comprehensive Income

For the years ending December 31, 2017

Net Income 2017 $126,000
Other comprehensive income or loss
Unrealized fair value adjusted on available for sale securities $1,155
Comprehensive income or loss, December 31, 2017 $127,155


B.


Pearl, Inc.

Statement of comprehensive Income

For the years ending December 31, 2018

Net Income 2018 $148,000
Other comprehensive income or loss
Holding Gains $42,000
Unrealized fair value adjusted on available for sale securities ($18,375 - $15,855) $(2,520)
Comprehensive income or loss, December 31, 2018 $145,480

Learn more about this topic:

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Financial Statement Presentation of Securities & Investments

from Accounting 202: Intermediate Accounting II

Chapter 2 / Lesson 5
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