Question

Assume that you are the accountant for Ellis Corporation, which has issued its 2016 annual report. You have received an inquiry from a stockholder who has questions about several items in the annual report, including why Ellis has not shown certain transactions on the income statement. In particular, Ellis’s 2016 balance sheet revealed two accounts in Stockholders’ Equity (Unrealized Gain/Loss—Available-for-Sale Securities and Loss on Foreign Currency Translation Adjustments) for which the dollar amounts involved were not reported on the income statement.

Select the statement that is not true in regards to the two accounts in Stockholders' Equity.

a.The Unrealized Gain/Loss - Available-for-Sale Securities account occurred when the company adjusted its investments for changes in the market value of the securities. These adjustments are considered gains and losses on the income statement.

b.The Unrealized Gain/Loss - Available-for-Sale Securities account occurred when the company adjusted its investments for changes in the market value of the securities. These adjustments are not considered gains and losses on the income statement but adjustments recorded directly to the Stockholders' Equity category.

c.The Loss on Foreign Currency Translation Adjustments account occurred when assets held in other currencies were converted to dollars. During the conversion, a gain or loss happens which does not get reported on the income statement.

d.Comprehensive income allows certain items to bypass the income statement due to their size and volatility and go directly to the balance in the Stockholders' equity section.

Answer 1

The statement that is not true in regards to the Unrealized Gain/Loss - Available-for-Sale Securities account and the Loss on Foreign Currency Translation Adjustments account is:

Statement a. The Unrealized Gain/Loss - Available-for-Sale Securities account occurred when the company adjusted its investments for changes in the market value of the securities. These adjustments are considered gains and losses on the income statement.

All the other statements b, c, and d are true.