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.

Question

Quizplus · Accepted Answer

Unrealized gains on trading securities affect net income and thus retained earnings. The after-tax effect is $20 million * (1 - 0.30) = $14 million, so equity is understated by $14 million.

A Company Failed to Record Unrealized Gains of $20 Million