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This 1 page Class Notes was uploaded by Albina Kertzmann on Friday October 30, 2015. The Class Notes belongs to SCH at University of Massachusetts taught by Staff in Fall. Since its upload, it has received 23 views. For similar materials see /class/232240/sch-university-of-massachusetts in Business, management at University of Massachusetts.
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Date Created: 10/30/15
13 berg School ofManagement SCHMGMT 521 Financial Reporting I Continuation of Available for Sale Securities Example Ray Pfeiffer Assume that net income from noninvestment sources in years 2000 and 2001 is 20 The income statement statement of comprehensive income and balance sheet will appear as follows 2000 Dr ltCrgt 2001 Dr ltCrgt Comprehensive Comprehensive income income statement Net income lt20gt statement Net income lt26gt OCI unrealized gain lt5gt OCI reclassi cation adjustment 5 Comprehensive income lt25gt Comprehensive income lt21gt Balance Balance sheet OCI equity 7 unrealized gain lt5gt sheet OCI equity 7 unrealized gain 0 Observations 39 Comprehensive income correctly re ects the economic gains and losses in each yeari that is 5 gain in 2000 and 1 additional gain in 2001 39 The reclassification adjustment serves to remove the double counting that would otherwise occur in the 2001 income statement 5 is included in net income for 2001 because there is a 6 realized gain on the sale ofthe securities and then removing the 5 from OCI equity results in another 5 recognized gain in the 2001 income statement 39 Under method 1 the 5 of unrealized gain that appears in the comprehensive income statement and in the OCI equity account come directly from the closing entry made on December 31 2000 Under method 2 the December 31 fair value adjustment entry creates the 5 that appears in the equity section the income statement amount is computed as the change in the equity account that is from 0 to 5 from the beginning to end of 2000 In 2001 the last two June 30 entries under method 1 explicitly remove the double counting ofthe 5 gain and reverse the 5 of OCI equity In method 2 as in 2000 the reclassi cation adjustment is equal to the change in the equity account from the beginning to the end of 2001 This reclassi cation is not explicit in method 2 preparing the statement of comprehensive income requires explicit adjustment ofthe OCI equity account and then recording of the change in OCI equity as the component of OCI in the income statement
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