Trading Securities are stocks (marketable securities) bought with the intention to be sold within a year. Usually these securities are sold within 3 to 6 months after purchase. They are reported as current assets on the balance sheet. They are considered to be a highly liquid asset like cash. These stocks are valued at market value or fair value. All unrealized gains and losses from the appreciation and sale of these securities are recorded for on the income statement.
Example 1:
Adequate Disclosure, Inc. purchases $100,000 of securities which it intends to sell within 5 months, also Adequate Disclosure purchases securities of $98,000 which it plans to hold for a year before selling it for twice its fair value. Which set of securities is considered to be trading securities?
Answer: The $100,000 worth of securities is considered to be Trading Securities.
Example 2:
On December 2nd 2012, Adequate Disclosure, Inc. purchases $200,000 of stock in Inadequate Disclosure, Inc. which it considers to sell by February 13th of 2013. It also has a bond from Company XYZ with a value of $56,000 and also a portfolio of securities labeled as available for sale securities worth $300,000. At year end the fair value of the stock of Inadequate Disclosure is $450,000 and the fair value of the portfolio is $298,000. What amount of unrealized gain is recognized on the income statement?
