A company has the following portfolio of marketable securities
1 Held for trading : original cost 12 000 000 , fair market value 12 500 000
2 Available for sale: original cost 17 000 000, fair market value 16 000 000
It’s net income in the current year will most likely be :
a) 500 000 higher
b) 500 000 lower
c) the same
My answer was a) but it is incorrect , why ?
unrealized gains and loses for Available for sale securities will be reported on OCI , and for trading securities on income statement -> net income will be 500 000 higher , Am I wrong ?
No - the only action described in the question is : securities ACQUIRED at the end of the last year and the NET INCOME in the current year will be ? If they were SOLD then I understand why my answer is wrong (maybe they implied that but forgot to mention in the question , who knows…)
I would go with either a or c. NI would be same becoz it has or would have already accounted for unrealized gain in HFT. Adjusting 500,000 would amt as double counting.
Depends on how question is phrased. Btw what does the explanation to ans say?
The explanation doesn’t mention the correct answer but here it is:
Whether securities are classified as held for trading or available for sale, they are measured at their fair value on the balance sheet. All gains/losses on held-for-trading securities are reported on the income statements, whereas the unrealized gains/losses on available-for-sale securities are reported in equity.