Question

Why is the answer D?

Company A buys 1,000 shares of Company B at $60 per share and records it as available for sale securities. The purchase occurs on December 20, 2008. On December 31, the market price of the share is $63 per share. As a result of this transaction:

A. Company A’s total assets do not change in 2008.

B. Company A’s net income increases by $3,000 in 2008.

C.Company A’s net income decreases by $6,000 in 2008.

D. Company A’s other comprehensive income increases by $3,000 in 2008.

Answer 1

.following HIGHLIGHTED para has taken from

IAS 39 — Financial Instruments: Recognition and Measurement

HENCE WE CONCLUDE THAT < we will recognize investments in securities in our case at a Fair value at the end of the year. fair value, in this case, is market value hence we will recognize Investment in shares B @(1000*63)=63000 for this we will following entry in books of accounts on 31st December:

Investment in B DR 3000

To unrealized profits on the increase in the value of shares B CR 3000

what is the impact of the above entry> it will increase investment and equity earning by 3000.

but the question is why A's other comprehensive income(OCI) has increased by 3000

traditionally we prepare only statement of profit and loss(SPL) account along with balance sheet and we recognise notional incomes like in this question through balance sheet by increasing retained earnings only through adjustment we did not recognise such a notional income in statement of profit and loss because we cannot recognize notional gains in SPL but due to change in global trends investors are interested to see total income including notional gains of companies as well therefore now we prepare OCI which is part tof SPL and incomes which cannot be recognised in SPL now can be recognisd in OCI.