Question

a) Explain trading securities ( debt v/s equity). Give 1 example of debt and 1 of equity securities?

b) What is the difference between Held-To Maturity Securities v/s Available for Sale - Securities?

c) Under the equity method securities describe investment in securities with controlling influence

Answer 1

a. Trading securities are those securities which an entity holds with an intention to sell them in the short term for a profit.

They are classified as a current asset in the balance sheet. They are presented at fair value in the balance sheet.

Any change in the value of the trading securities on the date of balance sheet will be recorded as gain or loss in the income statement.

There are two categories of trading securities;

1.Debt security. example ; Bonds.

2. Equity security.; Example; common stock.

b.Held to maturity investments are the ones which would make a regular periodic payments and the entity intends to hold them till their date of maturity, for example; debt securities make periodic interest payments and will generally be held till maturity.

Held to maturity investments are classified as long term investments, unless they are maturing within a year.

They are reported at amortized costs.

Available for sale securities;

These securities are held with the intention of selling them before their maturity.

They are reported at their fair value.

An account called accumulated other comprehensive income will be created to record unrealised gains and losses arising out of held for maturity securities.

c.Investment in securities will be considered as investment with controlling influence if the investor is able to exercise controlling influence on the investee.

Generally investors holding atleast 50% of voting stock are assumed to be exerting controlling influence on the company.