Question

In what way is the accounting treatment of “trading securities” similarto “available for sale securities”?

In what way is the accounting treatment of “trading securities” different than“available for sale securities”?

These two methods are knowns as the ___________ value methods.

Answer 1

The accounting treatment of trading securities is similar to that of available for sale securities with respect to the period end valuation where both are valued at their fair market values.

The accounting treatment of trading securities is different than that of available for sale securities with respect to the reporting of the changes in fair value of the securities in the financial statements.

In case of trading securities, the changes in fair value (i.e. difference between fair value and cost) is recognized as an unrealized gain or loss and is reported on the income statement for the period. However, in case of available for sale securities, the changes in fair value are excluded from the income statement and are reported as part of the stockholders’ equity.

These two methods are known as the fair market value methods.