Question

Q2. The income statement for Universal Corporation reported net income of $68,400 for the year ended December 31 before considering the following: • During the year, the company purchased available-for-sale securities. • At year-end, the fair value of the investment portfolio was $8,100 more than cost. • The balance of Retained Earnings was $43,000 on January 1. • Dobson Corporation paid $11,000 in cash dividends during the year. Calculate the balance of Retained Earnings on December 31.

Answer 1

Calculation of balance of Retained Earnings on December 31 :

Particulars	Amount ($)
Balance of Retained Earnings on January 1	43,000
Add : Net income for the year ended December 31	68,400
Add : Fair Value Gain on Available for Sale Securities (See Note below)	8,100
Less : Cash Dividends paid during the year	(11,000)
Balance of Retained Earnings on December 31	1,08,500

Note : Available-for-sale securities means securities are held for trading purpose to realize trading gains. Hence, on the reporting date, they are marked to market value (fair value) and any gain/loss is recognized in income statement as unrealized Fair value gain/loss. Hence, $ 8,100 of fair value gain is credited/added to retained earnings.