Question

Data regarding Rock Corp.’s available-for-sale securities follows: Cost Market Value December 31, year 8 $ 80,000 $ 65,000 December 31, year 9 $ 80,000 $ 90,000 Differences between cost and market values are considered temporary. Rock does not elect the fair value option of accounting for available-for-sale securities. By what amount should Rock increase (credit) its year 9 other comprehensive income?

Answer 1

Rock Corp. should credit its year 9 other comprehensive income by $25,000 due to the $15,000 recovery of value from the prior year's decline and the additional $10,000 increase in the market value of their available-for-sale securities.

Step-by-step explanation:

The student has asked about the adjustment to other comprehensive income due to the changes in market value of available-for-sale securities at Rock Corp. Since the company does not elect the fair value option, the increase in market value from year 8 to year 9 would be recorded in other comprehensive income. At the end of year 8, the securities were valued at $65,000, which was $15,000 below cost.

However, by the end of year 9, the market value increased to $90,000, which is $10,000 above cost. Therefore, Rock Corp. should increase (credit) its year 9 other comprehensive income by $25,000 - which is the $15,000 recovery of the previous year's decline, plus the $10,000 additional increase in value.

Answer 2

Answer: $25,000

Step-by-step explanation:

From the information given in the question, we can see that for the year 8 which ended, the loss of ($80,000 - $65,000) = $15,000 was recognised.

For year 9, while the cost was given as $80,000, it should be noted that the market value was being given as $90,000. Therefore, the amount that will be recognized as the other comprehensive income will be:

= $90,000 - $65,000

= $25,000.