Question

A company failed to record unrealized gains of $21 million on its trading security investments. Its tax rate is 40%. As a result of this error, total shareholders' equity would be:______.

a) Understated by $12.60 million
b) Understated by $21.00 million
c) Understated by $8.40 million
d) Unaffected

Answer 1

A) Understated by $12.60 million

Step-by-step explanation:

Given that,

Unrealized gains = 21 million

Tax rate = 40%

Total shareholders equity therefore

= 21,000,000 × (1 - 0.40)

= 21,000,000 × 0.60

= $12,600,000

Therefore, total equity will be understated by $12.60 million