A company failed to record unrealized gains of $20 million on its trading security investments. 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.Unrealized gains on trading securities are included in earnings, so retained earnings would be increased by the after-tax amount: $20,000,000 x (1 - 30%) = $14,000,000.

Question

Quizplus · Accepted Answer

Unrealized gains on trading securities are included in earnings, so retained earnings would be increased by the after-tax amount: $20,000,000 x (1 - 30%) = $14,000,000. Therefore, total shareholders' equity would be understated by $14 million.

A Company Failed to Record Unrealized Gains of $20 Million