Question

The 2017 annual report of Albany Corporation reports the following (in millions):

	Amortized Cost	Fair Value
December 31, 2016
Short-term investments — available-for-sale debt securities	$840.7	$835.0
Short-term investments — trading debt securities	108.4	94.2
Total short-term investments	$949.1	$929.2
December 31, 2017
Short-term investments — available-for-sale debt securities	$ 462.9	$ 463.4
Short-term investments — trading debt securities	79.5	75.6
Total short-term investments	$542.4	$539.0

a. What amount does Albany report as trading debt securities on its balance sheets for 2017?

b. How do the net unrealized gains (losses) on the company’s trading debt securities affect pretax income for 2017?

Answer 1

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For purposes of valuation and financial reporting, Trading Securities are always short term and classified as a current asset on the balance sheet.

The accounting method used is the fair value method. Report market value on the balance sheet and report the difference between cost and market value as an unrealized gain or loss on the income statement.

In the present case:

Million $

Cost of Trading debt securities

79.50

A

Fair Value of Trading debt securities

75.60

B

Fair Value is lower than cost so it is to be shown fair value i.e. $ 75.60 Millions.

Loss on Trading debt securities

3.90

C=A-B

Effect on Pre Tax Income

As there is a loss on Trading Debt Securities so pre tax income of Albany Corporation will be lower by $ 3.90 millions.