 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. 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 in common stock of 100,000. At that date, the company had no other assets liability or equity balance. Simply put, 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 $1,000, total asset of $1,000, common stock of $100,000, total equity of $1,000. 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 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 $2,000, that's the journal entry. Therefore, we sold them at $42,000, the cost is $40,000, the realized gain is $2,000. 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 we 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, those $60,000 are worth the day, the fair value is $64,000. Well, $60,000 cost, $64,000 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 a gain of $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. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. In 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 $42,000, 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 $64,000. 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, but 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, $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 would 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. Accumulated under 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 $109,000. 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. So it's very easy to go back and forth between my material and your CPA review course. 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 others. 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 as 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, 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. This is where the 40,000 fair value and under my equity section, I will have AOCI and it will have 40,000. And obviously, this is a partial balance sheet. Let me show you what happened on a T-account and 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 transferred it to AOCI and this is where it end up on the balance sheet. Now what I'm going to do, I'm going to sell my Lenovo for 165. Remember the Lenovo had a cost of 140. I'm going to sell it for 165. Let's do the journal entry. I'm going to debit cash 165. I'm going to credit my debt investment 140 and I'm going to credit gain 25,000. So hold on a second. When I sold it on June 15, 20X1, I recorded a gain. 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. This is June 1, 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 going to 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. In 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, 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. Now let's take a look at the portfolio at the end of year of 20x2. At the end of 20x2, the fair value of AMC robotics bond is 255,000. So remember, the Lenovo bonds are gone because we sold them. So Lenovo bonds cost 140, fair value 165, they are sold, we don't have to worry about their fair value. The AMC robotics started at 220, end of year one was 235, and we are told at the end of year two, it's 255. Therefore for these bonds, we are moving to the right, you remember on the number line, basically we are moving to the right 20,000, 20,000. Well what's the journal entry? We're going to debit fair value investment 20,000, credit unrealized holding gain equity of 20,000 to reflect our AMC bonds increase by 20,000 to 35,000. And that's the only stock in the portfolio we have left. We put the Lenovo AOCI for year one was already removed, we removed that therefore it's gone out of OCI. The AMC robotics went from 15 to another 20, so a total of AOCI should be 35. The fair value adjustment was 40,000 from the prior year, and now it has to be only 35. Now we have to go down, basically we have to bring down fair value adjustment by five. Although our bond went up in value, overall fair value will have to come down by five, because now the total fair value should be 35. Therefore we have to bring down fair value. The fair value adjustment is a 5,000, because the fair value, so let's just take a look at it from a journal entry perspective. It was 40 from the prior year, now it has to be 35, it has to go down by 5,000, it has to go down by 5,000. Now let's take a look at the comprehensive income. Adam Company report net income of 520 at the end of year X2. So if net income is 520, that includes the realized gain that we incurred. The other comprehensive income unrealized loss is 5,000. Remember we had to bring down the fair value adjustment by five, and doing so will have a 5,000 and unrealized holding loss, other comprehensive income. Now what's going to happen with this 5,000? This 5,000 will have to be closed to AOCI, therefore we debit other accumulated comprehensive income 5,000 and credit unrealized holding loss equity, which it's a loss, it has to be gone of 5,000 and we transfer this 5,000 to the balance sheet to AOCI. Let's go ahead and review all the journal entries to see how everything went from a journal entry perspective. 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 lost 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 going to 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 going to 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.