Question

Use the following information on a company's investments in debt securities. The company's accounting year ends December 31.

Investment	Date of Acquisition	Cost	Fair Value 12/31/19	Date Sold	Selling Price
Colt Company bonds	9/20/19	$38,000	$37,000	2/10/20	$42,000
Dana Company bonds	10/2/19	14,000	14,200	1/17/20	13,000

1. If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2019 income?

2. If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2020 income?

3. If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities in 2019 income?

4. If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities in 2020 income?

Answer 1

1	When the investments held as trading securities, then any gain or loss due to change in Fair value reported as gain or loss in the income statement
	Colt Company bonds
	Purchase price = $38,000
	Fair Value as on 31st Dec 2019 = $37000
	As Fair value is less than the purchase price, therfore the loss of $ 1000 ($38000-$37000) reported as loss on securities in 2019 income statement
	Dana Company bonds
	Purchase price = $14,000
	Fair Value as on 31st Dec 2019 = $14,200
	As Fair value is more than the purchase price, therfore the gain of $ 200 ($14200-$14,000) reported as gain on securities in 2019 income statement
2	In 2020, when the securities held as trading are sold
	At the time of sale, the difference between the sale value and fair value reported as gain or loss on sales of securities in income statement
	Colt Company bonds
	Selling price = $42,000
	Fair Value as on 31st Dec 2019 = $37000
	As Fair value is less than the selling price, therfore there is gain of $ 5000 ($42000-$37000) reported as gain on securities in 2020 income statement
	Dana Company bonds
	Selling price = $13,000
	Fair Value as on 31st Dec 2019 = $14,200
	As Fair value is more than the Selling price, therfore there is loss of $ 1200 ($14200-$13,000) reported as loss on sale of securities in 2020 income statement
3	If securities held as avaiiable for sale, then any change in fair market value till the time the securities are sold are routed through equity as other comprehensive income. Then at the time of sale all the gain or loss routed through income statement
	So, in this case no amount of gain or loss that arise due to change in Fair value reported in income statement
4	At the time of sale
	Colt Company bonds
	Selling price = $ 42000
	Fair Value = $ 37,000
	Gain on sale = $42,000 - $37,000
	Gain on sale (A) = $5,000
	Loss in 2019 due to the change in fair value, reported as other comprehensive income in equity also moved to income statement in 2020
	Loss = Fair value - Purchase price
	Loss = 37,000 - 38,000
	Loss (B) = 1,000
	Net Gain (A- B) in 2020 = 5000-1000
	Net Gain (A- B) in 2020 = 4000
	Dana Company bonds
	Selling price = $ 13,000
	Fair Value = $ 14,200
	Loss on sale = $13,000 - $14,200
	Loss on sale (A) = $1,200
	Gain in 2019 due to the change in fair value, reported as other comprehensive income in equity also moved to income statement in 2020
	Gain = Fair value - Purchase price
	Gain = 14,200 - 14,000
	Gain (B) = 200
	Net loss (A- B) in 2020 = 1200-200
	Net loss (A- B) in 2020 = 1000