Question

A company failed to record unrealized gains of $38 million on its available for sale debt...

A company failed to record unrealized gains of $38 million on its available for sale debt security investments. Its tax rate is 30%. As a result of this error, comprehensive income would be (Round million answer to 2 decimal places.):

Multiple Choice

  • Understated by $26.60 million.

  • Understated by $11.40 million.

  • Understated by $38.00 million.

  • Unaffected.

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $13 million as of December 31, 2018. Prewitt has a tax rate of 35%. Prewitt's retained earnings as of December 31, 2018, would be (Round million answer to 2 decimal places.):

Multiple Choice

  • Understated by $8.45 million.

  • Overstated by $4.55 million.

  • Overstated by $8.45 million.

  • Understated by $4.55 million.

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Answer #1

Answer- As a result of this error, comprehensive income would be = Understated by $26.60 million.

Explanation- The amount of comprehensive income would be understated by = Unrealized gain available for sale debt security – Tax rate

= $38 million- ($38 million *30%)

= $38 million- $11.40 million

= $26.60 million

Where- Unrealized gains on securities available for sale are reported net of tax in other comprehensive income.

Answer- Prewitt's retained earnings as of December 31, 2018, would be = Understated by $8.45 million.

Explanation- Retained earnings as of December 31, 2018, would be understated by =Amount of accumulated depreciation- Tax rate

= $13 million - ($13 million*35%)

= $13 million - $4.55 million

= $8.45 million

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