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Assume the company has investments in debt securities. One is classified as a trading security and...

Assume the company has investments in debt securities. One is classified as a trading security and the other is classified as an available-for-sale security. Create a scenario where it is year end and the investments have changed in fair market value. Describe the scenario and explain how the financial statements would be affected. Be detailed and include numbers in the examples. Include any applicable journal entries.

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Expert Solution

Trading securities are those which are held to be sold out in a period of short time. Such securities are recorded at their fair market value and the increase or decrease in their fair market value is recorded as an operating income or operating loss.

  1. In case of increase in value of trading security

Trading securities AC DR      XXX

To Gain on increase in value AC CR     XXX

[Being any increase in the value has been recorded as income]

  1. In case of decrease in value of trading securities

Loss on trading securities AC DR   XXX

To Trading securities AC CR                          XXX

[Being there has been a loss in the value of trading securities]

The securities that are held for sale are those securities that are hold to be sold before maturity and are not held for trading. Such securities are also booked at their fair market value but any increase or decrease in their value is booked again “Unrealized income/loss”.

  1. Increase in value

Securities available for sale AC DR XXX

TO unrealized gain AC CR                              XXX

[being the gain is not yet realized]

  1. In case of decrease in the value

Unrealized loss AC DR      XXXX

To Securities available for sale AC CR          XXX

[being the loss is not yet actual loss since the securities are not yet sold]

ekkarill92 answered 3 days ago
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