A Company Failed to Record Unrealized Gains of $20 Million

question 1

Multiple Choice

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.

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Definitions:

Substitutable Products

Goods or services that can serve as replacements for each other; demand for one increases when the price of the other increases.

Sold

The past tense of sell, indicating that an item or service has been exchanged for money or its equivalent.

Price Fixing

An unlawful agreement between competitors to establish, raise, or maintain prices at a certain level, often aimed at maximizing profits by eliminating competition.

Distributor

An intermediary entity that buys products from manufacturers and sells them to retailers or directly to consumers.