Hang
Technologies Inc. held a portfolio of shares and bonds that it accounted for
using the fair value through other comprehensive income model at December 31,
2011. This was the first year that Hang had purchased investments. In part due
to Hang's inexperience, by December 31, 2011, the market value of the portfolio
had dropped below its original cost by $28,000. Hang recorded the necessary
adjustments at December 31, 2011, and was determined to hold the securities
until the unrealized loss of 2011 could be recovered. By December 31, 2012,
Hang's goals of recovery had been realized and the original portfolio of shares
and bonds had a fair market value $5,500 higher than the original purchase
costs. Hang's income tax rate is 38% for all years.
Assume
that any gains that will ultimately be realized on the sale of the shares and
bonds are taxable as ordinary income when they are realized.
Instructions
(a)
Prepare the journal entries at December 31, 2011, to accrue the unrealized loss
on Hang's securities and the related income taxes.
(b)
Prepare the journal entries at December 31, 2012, to accrue the unrealized gain
on the securities and the related income taxes.
(c)
Prepare a comparative statement of comprehensive income for the fiscal years ending
December 31, 2011 and 2012. Assume net income of $100,000 in each fiscal year.
(a)
Holding Loss on FV-OCI
Securities
Shares (OCI)................................................. 28,000
Investments
in Securities (FV-OCI)............................. 28,000
Future Income Tax Asset........................................................ 10,640
Future
Income Tax Benefit (OCI)................................. 10,640
[($28,000
X 38%) – $0]
(b)
Investments in Securities (FV-OCI)....................................... 33,500
Holding
Gain on FV-OCI
Securities Shares (OCI).................................... 33,500
($28,000
+ $5,500)
Future Income Tax Expense (OCI)........................................ 12,730
Future
Income Tax Asset.............................................. 10,640
Future
Income Tax Liability........................................... 2,090
($5,500 X 38%)
Balance, Dec. 31, 2012: ($5,500 X 38%) $(2,090) L
Balance before adjustment 10,640 A
Adjustment to balance sheet and 2012 expense .............. $12,730
(c)
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Hang Technologies Inc.
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Statement of Comprehensive Income
Year Ended December 31,
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2012
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2011
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Net income
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$100,000
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$100,000
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Other comprehensive income
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|
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Holding gains (losses) on FV-OCI
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33,500
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($28,000)
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investments
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Less: future income tax
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(expense) benefit
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(12,730)
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10,640
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Other comprehensive income (loss)
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20,770
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(17,360)
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Comprehensive income
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$120,770
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$82,640
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