Chapter 12, Problem 12.30E

To determine

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Available-for-sale (AFS) securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs, or manage interest risk.

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Comprehensive income: The total of net income and other comprehensive income (OCI) is referred to as comprehensive income. Comprehensive income should be reported on income statement, and statement of comprehensive income.

Other Comprehensive income: OCI includes all financial items which result in changes in the stockholders’ equity, other than stock investments and dividends.

Other-than-temporary (OTT) impairment: When the market value of an investment declines to a value lower than its cost, it is referred to as OTT impairment. The OTT impairment is considered as permanent loss and the loss is recorded as decrease in net income or earnings.

Unrealized holding gains and losses: These are gains and losses which are unrealized and are the result of changes in cost and fair values of the investment for the period the investment is held.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To Prepare: The journal entries and their corresponding effects on the net income, comprehensive income and other comprehensive income related to the investment made by Company K.