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Trading securities include debt securities and equity securities with readily determinable fair market values, and which the owner does not have significant influence or control over the investee. Like trading securities, available-for-sale securities also include debt securities and equity securities with readily determinable fair market values and for which the owner does not have significant influence or control over the investee. However, available-for-sale securities are not bought and help principally for the purpose of selling them in the near term. Investments in securities not classified as trading, should be considered available for sale unless in the case of debt securities the purchaser intends to hold them to maturity. Hence, these securities include
188 investments in securities that are to be held for longer-term price appreciation and other purposes. b. Trading securities are classified in the balance sheet as current assets. This is because they are purchased to be held only for a short period of time. Management intent regarding the purpose of the buying and holding the securities must be ascertained in order to determine whether to classify them as trading or available-for-sale. Available-for-sale securities may be classified in the balance sheet as either current or long-term. In determining the specific classification, we are to refer to the provisions FASB ASC 210-10-20.Thisguidanceindicates that an asset is considered current if it will be consumed or converted into cash within the normal operating cycle of the business or one year whichever is longer. c. Unrealized gains and losses are recognized in the income statement for trading securities and as an adjustment to stockholders’ equity (now a component of comprehensive income) for securities that are available-for-sale. That is, holding gains and losses are given the same treatment as realized gains and losses when the security is considered a trading security. d. This question has no real answer but is meant to allow students to ponder the issue. Presumably companies have short term securities to speculate in the near term. Long-term securities are held because they provide a cash return and for price appreciation over the long-term. Also, long-term securities may be held in order for the investor to influence or even control investee activities. e. If the fair value option is elected for available-for-sale and/or held-to-maturity securities when SFAS No. 159(See FASB ASC 825-10) is adopted, they are to be reported as trading securities. The cumulative effect of the gains and losses for these securities are to be reported as an adjustment to retained earnings. Case 10-6 Situation 1 When a stock experiences a decline in value that is considered other than temporary, its value is considered impaired. This stock is in a noncurrent portfolio, hence, it is not a trading security. If the security is considered available-for-sale, the loss should be