Question

Consider the following two separate events for a company during the year:

1. Loss on sale of investments = $20.
2. Unrealized gain on investment from increase in fair value = $30.

The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect the balance of retained earnings, ignoring tax effects?

Multiple Choice

• Decrease of $20.

• Increase of $10.

• Increase of $30.

• Decrease of $10.

Answer 1

Answer: Decrease of $20.

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Event 1

The loss of $20 on the sale of investment decreases the net income by $20. As a result, retained earnings balance decreases by $20.

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Event 2

The unrealized gain of $30 on investment does not impact net income as this unrealized gain does not form part of the income statement. (Mentioned in the question itself that The company reports the unrealized gain as a component of other comprehensive income)

Since the unrealized gain of $30 on investment does not impact net income, retained earnings balance also won't be affected.

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So, the overall effect would be that the retained earnings balance decreased by $20.