 Hello, and welcome to the session in which we would look at comprehensive income and reclassification adjustment at the same time. This recording would require some prerequisite from your end. It would require that you understand how to mark to market your investment and basic understanding of comprehensive income. Although I'm going to go over comprehensive income from zero, but if you already have some knowledge about comprehensive income, it will be helpful, although I will build a comprehensive income statement from scratch. I'm going to be using a single period example to simplify things, to show you in a single period what would happen, that I'm going to be using a multiple period example where you would see what's going on from period to period. Let's start with a simple example. Assume that on January 1st, 20X1, Adam had cash and common stock of 100,000. At that date, the company had no other assets liability or equity balance. We are starting a company and we invested $100,000 in this company. So on January 2nd, Adam purchased $100,000 of that classified as available for sale. Now the company took that $100,000 in cash and purchased that. And here's what happened. This is when we started the company. We only had a cash of a thousand, total asset of a thousand, common stock of a 100,000, total equity of a thousand. Then we used the cash to buy that investment. We still have assets of 100,000, equity of 100,000. On June 30th, Adam sold 40,000 of the available for sale securities, that portfolio for 42,000. What we did is we sold, remember we purchased 100,000 worth of that investment and in case you don't know how to do this, we debited investment 100,000. We credited cash 100,000. Now we sold 40,000. We're going to debit for 42,000. We're going to debit cash 42,000. We're going to credit the investment 40,000, which is this account here. And we're going to have a gain of 2000. That's the journal entry. Therefore, we sold them at 42, the cost is 40, the realized gain is 2000. Now of the 60,000, we have left 40,000 because we sold 40,000. We still have 60,000 worth of investment. Also what we did is we received $3,000 in interest revenue. Well, what's going to happen when you receive the interest revenue, we debit cash 3,000. We credit interest revenue 3,000 for the interest revenue. Here's what our income statement would look like. Our income statement would look, well, let's look at our portfolio first. Our portfolio at the end of the year would look something like this. We still have 60,000 of securities. Though 60,000 are worth today, the fair value is 64,000. Well, 60,000 cost, 64 fair value. We have an unrealized gain of 4,000. This is unrealized versus realized, which we sold. Now these are available for sale securities. We debit fair value adjustment, 4,000. We credit unrealized holding gain loss, equity. This is an equity account and simply it's again a 4,000. Now, if you don't know how I did this entry, if you are lost, stop, go to my available for sale debt securities and see how we market those investment to market because this is what I did. I increased my fair value by 4,000 and I recorded this. I recorded the gain and unrealized holding gain equity. My income statement would look something like this. I have 5,000 in total net income, 3,000 of interest revenue and 2,000 from the sale, the realized gain. Remember I sold those 40,000 worth of that for 42, I made a gain of 2,000. And this is what my statement of comprehensive income would look like. I'm going to have one statement for comprehensive income that included net income. So I'm going to start with net income, 5,000 plus other comprehensive income will include unrealized holding gain of 4,000. Remember my portfolio went up by 4,000. Remember I still have an investment for 60,000 and that investment went up to 64. Therefore, the 4,000 it's recorded in other comprehensive income, unrealized holding gain or loss. Now what happened to this 4,000? This 4,000 will be closed to accumulate other comprehensive income on the balance sheet. So this 4,000 will be closed. Simply put, I'll show you later how it's closed. Simply if you want to see this one, how we close this one. So how do we close this to accumulated other comprehensive income? We will debit. See what we do? We will debit unrealized holding gain slash loss equity of 4,000. And we credit accumulated other comprehensive income 4,000. So we credit AOCI and we'll see it later in a journal entry. But this basically is gone. It was a credit. We debited it and we moved it to OCI, which is a balance sheet account. Don't worry, we'll look at another entry soon. Now let's take a look at the statements of stockholders' equity. Just to kind of have a complete picture, we started with 100,000 of common stock. Nothing happened to our common stock. Net income, we generated net income of 5,000, which increases retained earning. Other comprehensive income, we have 4,000 from the increase in the value. Therefore, our common stock total is 100,000. Retained earnings total is 5,000. Other accumulated other comprehensive income is 4,000 because everything in unrealized holding gain or loss goes to accumulated other comprehensive income AOCI. Therefore, our total equity is 109, which is common stock of 100,000. Retained earnings of 5,000 and AOCI of 5,000. Now let's take a look at the balance sheet. At the end of the year, this is the original balance sheet. Basically, very clean, 100,000 in cash, 100,000 in common stock. Well, what's going to happen is this. Now we have 45,000 in cash, which is the 42,000 from the sale, plus the 3,000 of interest income. This is the value, the fair value of the investment, total of 109. We still have common stock of 100,000. Our retained earning went up by 5,000 in net income and we closed unrealized holding gain or loss to accumulated other comprehensive income on the balance sheet. Therefore, 109 equal to 109. This is what our balance sheet would look like by the end of the year. Simply put, all what I did is I worked very simple example to show you how comprehensive income is actually closed to AOCI on the balance sheet. The next thing I'm going to be discussing is a multiple period adjustment. Before we look at the multiple period adjustment, whether you are an accounting student or a CPA candidate, I would like to invite you to visit farhatlectures.com. I don't replace your CPA review course. I don't replace your accounting course. My motto is saving accounting students and CPA candidate one at a time. How? By providing new resources, lectures, multiple choice through false exercises that's going to complement and supplement your CPA preparation and your accounting courses. This is a partial list of my accounting courses. My CPA resources are aligned with your Becker, Roger, Gleam and Wiley. It's very easy to go back and forth between my material and your CPA review course. In addition to all my resources, I give you access to 1,500 previously released AICPA questions in their original format. In their original format, what does that mean? It means those are actual CPA questions that appeared on prior exams with detailed solution. I have a detailed solution for these questions because the AICPA don't provide those detailed solution. If you have not connected with me on LinkedIn, please do so. And take a look at my LinkedIn recommendation like this recording. Share it with other. It helps me a lot. Connect with me on Instagram. I'm trying to grow my following Facebook, Twitter and Reddit. Let's work an example to look at a multiple period adjustment. In a multiple period adjustment, we might have what's called double counting may occur. What is double counting? Double counting occur when you have an unrealized gain for a security that's sitting in comprehensive income. Then you sell the security and you have a gain that's reported in that income. So we should not have double counting. So we have to find a way to adjust the double counting. The best way to illustrate this is to take a look at an example. And we're going to have a portfolio of two bonds, Lenovo and AMC Robotics. Lenovo has a cost of 140, fair value of 165. AMC Robotics 220 is an amortized cost and 235 as fair value. All in all, we have an unrealized holding gain of 40,000. Again, we need to book this gain. We have no prior fair value adjustment. Once again, if you don't know how to do fair value, go back to my available for sale debt securities to find out how to do. So we're going to debit fair value adjustment, 40,000. Credit unrealized holding gain of 40,000. Now we have 40,000 of holding gain from this portfolio because we have 40,000 of holding gain. Now, this is what comprehensive income would look like. Assuming the company has 380,000 of net income, we're going to start with net income, then we're going to add other comprehensive income, which is unrealized holding gain of 40,000. Now, this is the entry. We're going to debit unrealized holding gain of 40,000 and credit accumulated other comprehensive gain. So what are we doing here? We are closing. We are closing. We are closing this gain. We are closing. Remember, I told you I'm going to show you the closing. Let me show you one more time. So look at this entry here. Look at this entry here. I debited fair value and I credited unrealized gain. You see, I'm going to have to close this unrealized gain. This unrealized gain has to go to AOCI. Okay, so this is what I did. So after I reported it on the comprehensive income, I transferred it to AOCI, accumulated other comprehensive income. And this is where it sits at the end of the balance sheet, at the end of the day. In AOCI on the balance sheet, I have 40,000 and I have 40,000 fair value adjustment. Therefore, my investment will be 200,000. Remember, I still have the AMC robotics plus the fair value. So this is the asset side. Okay, this is where the 40,000 fair value. And under my equity section, I will have AOCI and it will have 40,000. Obviously, this is a partial balance sheet. Let me show you what happened on a T-account. In a T-account, first thing I did is the starting point was I debited fair value and I credited unrealized holding gain or loss to book my 40,000 of unrealized holding gain. Then what I did is I closed unrealized holding gain. I debited unrealized holding gain. Now unrealized holding gain is zero and I transfer it to AOCI. And this is where it end up on the balance sheet. Now what I'm gonna do, I'm gonna sell my Lenovo for 165. Remember, the Lenovo had a cost of 140. I'm gonna sell it for 165. Let's do the journal entry. I'm gonna debit cash 165. I'm gonna credit my debt investment 140 and I'm gonna credit gain 25,000. So hold on a second. When I sold it on June 15, 20, X1, I recorded a gain. Now let me show you something. That Lenovo, that same stock, I already recorded a gain for it in equity. Where's the gain? Look, I had a gain the prior year. At the end of the prior year, I had a gain of 25,000 and that gain made it to unrealized holding gain and made it to the balance sheet. So I have 25,000 in OCI, unrealized holding gain. So let me just do this real quick. Let me, I need to change this. Change this. June 1st, X2, not X1, okay? June 15, X2. This is a year after I did it. So what do I have to do? I have to back out. I have to take out of unrealized holding gain on loss 25,000. So I will debit unrealized holding gain or loss 25,000, credit fair value adjustment. Why do I do this? Because at some point in the past, I showed you at the end of the year, I debited, I'm gonna abbreviate fair value adjustment, this account. I debited it in total 25 and I credited in total unrealized holding gain slash loss equity. I debited 40 and I credited 40 in total. Within this 40, I had 25,000 of gain for this stock, for Lenovo stock. Therefore, when I sold it, I recorded the gain of 25,000. Therefore, what do I have to do? I have to remove the gain that I booked earlier. Otherwise, then I'm showing my equity will go up by 50. Why? If I don't do so, the unrealized holding gain increase my equity by 25, then gain on the sale of the investment will increase my equity by 25. Well, that's not true. I only have 125. Therefore, I have to remove this old 25,000 that was part of the 40. Therefore, I did this, I removed it. So this portfolio would look like at the end of 20 X2. I still have the AMC Robotics Bond. They have a cost of 220, 220 amortized cost, fair value of 25. Therefore, the unrealized holding gain or loss a gain of 35,000. Now, the adjustment is 5,000. Let me show you how the adjustment is 5,000. If you remember, my fair value from the prior year was 40,000. I had a fair value, 40,000. Now I need to reduce it down to 35. Well, what do I need to do? This is my fair value adjustment. I need to credit this account 5,000. And by crediting this account 5,000, I debit, remember the corresponding is unrealized holding gain slash loss of 5,000. Now, don't worry, I'm going to show you this a little bit in detail. You're going to see, but your fair value is not really 4,000. Your fair value is something else. True. I'm going to show you this. I'm going to show you the adjustment in a moment. Let's assume Adam Company reported net income of 520,000 and 20 X2. So the statement of comprehensive income would look something like this. Net income minus the unrealized holding gain of 5,000, which is give us comprehensive income of 515. OK, again, what do I do with this 5,000? I will close it to OCI. So let me show you what really happened from a journal entry perspective, from a T account perspective, so you understand this full picture. Here's what we did. We started again with 40,000 fair value adjustment. This is year X1. Then what I did is in X1, I transferred the 40,000 to OCI from unrealized holding gain. Also, this was X1. Then when I sold my investment, if you remember, I removed out of fair value, I removed out of fair value, 25,000. I told you I have to move this. So I credited fair value and I debited, accumulated other comprehensive income. If you remember this one, I made the sale. The second entry was to take care of that. Now, so what happened is my balance at that point after I removed the 25,000, my balance was 15,000. My balance was 15,000. Then here comes the end of the year. By the end of the year, I needed a balance and my fair value of 35. Why? Because the portfolio, let's take a look at the portfolio. The portfolio has a gain of 35. Well, if I need 35 and I already have 15, what do I need to do? It means I need to debit my fair value 20. I need to credit my unrealized holding gain and loss 20 because this is how I adjust my portfolio. Well, this is what I do. And once I adjust my portfolio, my balance is 35. Again, what do I need to do? This 20,000 that I X2 adjusting, X2 adjustment will need to be close to OCI because remember, unrealized holding gain goes to OCI. So on X2, I'm gonna debit unrealized holding gain and credit OCI X2. So I moved this 20,000, so basically this account goes down to zero and I moved it to here. Now I have, notice I have 35 in other comprehensive income, 35 in fair value adjustment and this is exactly what I need. So notice where the 5,000 fits. If you look at, if everything all said and done, let me highlight it in a different color, you would see that my adjustment of, now you're gonna see where my adjustment of 5,000 came from, look. I debited, I debited 25, I credited 20, therefore the net, what's the net? The net is a debit of 5,000. This is the net, the net is five and I did the same thing here. I credited 25, I debited five, the net is credit of five and this is the adjusting entry that I told you the 5,000. I debited OCI and I credited fair value adjustment. Look, this is what I did here. I credited fair value adjustment and I debited unrealized holding gain or loss. It doesn't matter, why? Because this is gonna be, I'm gonna close this. This is gonna be close to OCI. So I'm gonna debit this and credit, I'm sorry, I'm gonna credit this and debit OCI, okay? So eventually what happened to this is this transfer to debit to AOCI. So I debited OCI and I credited fair value adjustment and this is what happened from a journal entry perspective. Now keep in mind, you don't touch the gain. The gain that goes on the income statement, you don't touch it. This is the gain that stays with us. We needed to remove the gain that was sitting in OCI, which we did. After all said and done, what's gonna happen is this, at the end of December 31st, 20X2, Adam Company will have a debt investment of 255, reported at cost 220 plus the fair value adjustment and accumulated other comprehensive income of equity of 35. We already saw this. And remember this entry that we made? Now we need to close it. We're gonna transfer the 5,000 to OCI. Therefore, we debit 5,000, this account to get rid of it and we debit accumulated other comprehensive income of 5,000. What should you do now? You should go to farhatlectures.com, work additional MCQs and look at additional resources that's gonna help you master this topic. Don't shortchange yourself. Whether you are an accounting student or a CPA candidate, my resources can help you do better. Good luck, study hard and of course, stay safe.