Question

What is the issue regarding the marketable securities as per below highlighted in red on Exhibit 2?

See the below information regarding the issue

ADVANCED HOME APPLIANCES INCOME STATEMENT For the year ended December 31 (unaudited) 2020 Sales Cost of sales Gross profit $2,775,990 1.499,035 1,276,955 Expenses Amortization Advanced and administrative Marketing and sales Office Expense Wages and benefits, administration Total operating expenses 155,490 534,500 459,704 395,980 515,000 $1,905,184 Operating income (loss) $ (628,229) Gain (losses) on marketable securities Impairment loss on capital assets Income (loss) before taxes Provision for (benefit from) income taxes Net income (loss) 12,455 (327,900) (934,674) (264,229) (679,445) 932,232 (679,445) 0 $ 252,787 Opening balance-retained earnings Net income Dividends Closing balance-retained earnings

Answer 1

ANS: Extracted Information from Income statement & Balancesheet are noted below for the year ended 2020 :-

• Gain from Marketable Securities = 12455
• Marketable securities = 115200
• Marketable securities = 278697 (No entries were made for the year 2020 - taken from Exhibit II)

If the proper accounting would be adopted the following entries are required to be passed for the Exhibit II items -

1. Investment A/c Dr. 278697

To Cash A/c 278697

(Being Investments are made or purchased)

2. Cash A/c Dr. 291152

To Investment A/c 278697

To Gain on Sale of Investment 12455

(Being Investment are sold worth $ 278697 at a profit of $ 12455)

BUT, As mentioned in Exhibit II, there were no addition or disposition in Marketable securities from 2019. Since no securities are being sold from year 2019 held till 2021, the possibilities of posting of entry No. 02 regarding sale of investment securities woun't arise at all.

So, the Income statement showing Gain on Sale of Investment of $ 12455 shall also becomes questionable; As no securities are being sold during the year, then from where these gains arise.

The above gain gets included in its Loss before tax, which reduces its loss from operating business. As due to reduced loss, company won't get tax benefit & able to Carry-froward reduced amount of business loss.

Furthermore, the Balancesheet showing the Marketable securities of $ 115200 in its Currents Assets is also not True & Fair Amount, as the entries of investments of $ 278697 as not accounted for. A rectification entry is required to pass by the accountant or Auditor to give the effect of the same in the Finacial Statements.