[sandy]

This question from Wiley book. I don’t understand how they got $5000 before tax for year 2. Can somebody explain?

A company buys ten shares of securities at $2,000 each on Dec 31 year 1. The securities are classified as available for sale. The company does not elect to use the fair value option for reporting its AFS. The fair value of the securities increases to $2500 on Dec 31, year 2 and to $2,750 on Dec 31, year 3. On Dec 31, year 3, the company sells the securities. Assume no dividends are paid and that the company has a tax rate of 30%. What is the amount of the reclassification adjustment for other comprehensive income on Dec 31, year 3?

a. $7,500

b. $(7,500)

c. $5250

d. $(5,250)

Answer d is correct.

Assuming the fair value option is not elected, the calculation of holding gains recognized in OCI is as follows:

Before Tax Income Tax Net of tax

Year ended 12/31/y2 $5000 $1,500 $3,500

Year ended 12/31/y3 $2,500 750 1,750

Total gain $7,500 $2,250 $5,250

Thanks

[makiu]

@sandy

Year 1 10 shares @$2000 = $20,000

Year 2 10 shares @2,500 FV = $25,000 $5,000 difference for year 2….

Year 3 10 shares @2,750 FV= $27,500

Reclassification Adj>>>>>>>>> $7,500@.70 net of tax = $5,250

Hope this help,

Good luck studying..

[sandy]

Thank you so much. I understand now. All the best for your exams too.

[makiu]

@sandy

Wish you the same, thanks

Aud-Passed

Bec-Passed

Far – July 20

Reg- Aug 31

[Author]

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