Question

A company failed to record unrealized gains of $26 million on its debt investments classified as trading securities. Its tax rate is 35%. As a result of this error, total shareholders' equity would be (Round million answer to 2 decimal places.):

Answer 1

Answer: Total shareholders' equity = $16.90 million

Explanation:

Unrealized gains or losses of  trading securities investment will be recorded in retained earnings.

Unrealized gains (net of taxes) will increase the balance of retained earnings, which is a part of shareholders' equity. If unrealized gains are not recorded then the retained earnings is understated.

$\therefore$Unrealized gains (net of taxes) = Unrealized gains - Taxes

= $26 million - 35% of $26 million

= $26 million - $9.10 million

= $16.90 million