A company failed to record unrealized gains of $20 million on its debt investments classified as trading securities. Its tax rate is 30%. As a result of this error, total shareholders' equity would be:
A) Understated by $14 million.
B) Understated by $7 million.
C) Understated by $20 million.
D) Unaffected.

Question

Quizplus · Accepted Answer

Unrealized gains on trading securities of debt investments are included in earnings, so retained earnings would be increased by the after-tax amount: $20,000,000 × (1 - 30%) = $14,000,000.

A Company Failed to Record Unrealized Gains of $20 Million