Question

3. Smith buys and sells securities. On December 15, 2018, Smith purchased $500,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2018, the Jones shares had a fair value of $525,000. In the 2018 financial statements, Smith will report (ignore taxes): A) Investment income of $25,000 in its income statement. B) Other comprehensive income of $25,000. C) Accumulated other comprehensive income of $525,000. D) An investment in Jones of $500,000.

Answer 1

On 15th Dec 2018,Smith buys shares worth $500,000 of Jones and elected Fair value Option (FVO) for Reporting.As of 31st Dec 2018, Jones share had a fair value of $525,000.

Other comprehensive income(OCI) includes revenues, expenses, gains, and losses that have yet to be realized. Example of an OCI is a portfolio of bonds that have not yet matured and consequently haven't been redeemed. Gains or losses from the changing value of the bonds cannot be fully determined until the time of their sale, therefore, the interim adjustments are recognized in other comprehensive income.

Accordingly, In 2018, financial statement of Smith, the Investment will be recorded in the fair value of the shares in the Balance sheet & the unrecognized Income will be reported as - Other Comprehensive Income. The amount will be $525,000 less $500,000 = $25,000 and the amount of Investment in shares of Jones will be Reported as Investment for $500,000