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December31
Year2 Year3
Cost $100,000 $100,000
Fair value90,000 120,000
Differences between cost and fair values are considered to be temporary. The decline in fair value was properly accounted for at December31, Year2. Ignoring tax effects, by what amount should other comprehensive income (OCI) be credited at December31, Year3?
A. $0
B. $10,000
C. $20,000
D. $30,000
D - the correct answer is $30,000 as this is the new fair value.
The correct option is $30,000
The rational of the option is that Investment available for sale records at fair value of investment at balance sheet any gain and loss report as unrealized gain/loss reports in other Comprehensive Income at at end of each year till disposal.
In this example unrealized loss reported amounting $(90,000-100,000=-10,000) in the year2 in the other comprehensive income and reduced the value of investment and reported as separate part of shareholders equity .
In the year3 the fair value of Investment was $120,000 , so that unrealized gain reported amounting $(120,000-90,000=30000).The main point is that to compute gain cost doesn't take into account because available for sales investment record at fair value at each balance sheet date.
