Question

FASB dictates that investments are held at market value - why is this? Meanwhile all other assets on the Balance Sheet are recorded at historical value, why is this so? Explain unrealized gain/loss and the accounting for any market value adjustments.

Answer 1

Other assets on the balance sheet are recorder on historical cost because for other assets we do not have any intentions to sell them in the near future and they are meant for continuous use in the business thus changes in it's valus do not bother us also it will be against the accounting concept of going concern whereby we assume that company will continue on for the foreseeable future thus recent changes in assets value is not reflected as we do not have any intention to sell them and they are continued to shown at historical value.

Unlike investments in securites which are shown at market value because they are purchased for immediate sale in near future and any changes occuring in their values in the near future is immediately reflected in balance sheet.

There are two types of gain or loss one is realized gain or loss and another is unrealized.

Realized profit or losses refer to profit or kisses from completed transaction whereas unrealized profit or losses are profit or losses that have occured on papers but relevant transactions have not yet completed.

Record realized profit or losses in income statement. And unrealized profit or losses are recognized in account called accumulated other comprehensive income which is found in owners equity section of balance sheet.

Adjustments :-

For instance , company holds $1000 worth of stock and it's it's rises to $1500.

Here on paper co. Made a profit of $500 on papers. However Co. Cannot record it as income following rhe principle of prudence. It is recorded as accrued other comprehensive income under equity section. Entry will be

Available for sale securities market value adjustment Dr 500

To unrealized gain or losses available for sale securities . 500