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Security One and Security Two are held for trading and Security Three and Security Four are measured at Fair value through other comprehensive income by election
Security One and Security Two are held for trading and Security Three and Security Four are measured at Fair value through other comprehensive income by election. During 2022, the entity sold Security Two for P1,000,000 and half of Security Four for P500,000. Revenues and operating (marketing and administrative) expenses for the year 2022 are P7,500,000 and P4,000,000 respectively. How much is the change int Retained Earnings for the year 2022 due to the equity securities (indicate whether increase or decrease)?
Expert Solution
| Change in Retained Earnings | ? 0 |
Step-by-step explanation
NOTE: The following computations are based on this table.
Please see attached files
Cost Market value Dec. 31, Market value Dec. 31, 2020 2021 Security one 2,200,000 1,400,000
900,000 Security two 700,000 1,000,000 1, 100,000 Security three 1,600,000 1,500,000 1,600,000
Security four 2,000,000 2,500,000 1,200,000
| Security Two | ||
| Sales Proceeds | ? 1,000,000 | |
| Less: Carrying Value, 12/31/2021 1,000,000 x 1/2 |
(500,000) |
|
|
Gain on Sale |
? 500,000 | |
| Security Four | ||
| Sales Proceeds | ? 500,000 | |
| Less: Carrying Value, 12/31/2021 2,500,000 x 1/2 |
(1,250,000) |
|
|
Debit to Retained Earnings |
(750,000) | |
|
Total |
? (250,000) | |
| Transfer of Cumulative Unrealized Gain (Losses) on Retained Earnings (1,250,000-1,000,000) |
250,000 |
|
| Change int Retained Earnings (due to securities) | ? 0 | |
| Net Income | ||
| Revenue | ? 7,500,000 | |
| Less: Operating Expenses | (4,000,000) | |
|
Net Income |
3,500,000 | |
| Net Change in Retained Earnings (TOTAL) | ? 3,500,000 |
Since the securities are sold in 2022, we will use their last carrying value (FMV, 12/31/2021) before the sale as a basis in computing gain or losses on the sale.
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