1) Identify and explain the three types of classifications for investments in debt securities.
2) Summarize how unrealized holding gains and losses should be reported for debt investments classified as trading, available-for-sale, and held-to-maturity.
Answer:
Trading securities are debt securities that are bought and held for sale in the near term, with the purpose of earning a profit from the price difference (buy low, sell high). They have a fair value and holding gains or losses are recognized in net income.
Securities held to maturity are securities that are intended to be held to maturity. They are valued at amortized cost, unrealized gains or losses are not not recognized.
Securities available for sale are not intended to be held to maturity and not held for sale in the near future (like trading securities(, but are available for sale now. Securities available for sale have a fair value and unrealized holding gains or losses are recognized as comprehensive income and as a separate component of stockholders equity.
Interest is recognized when earned and gains or losses are recognized when they are sold for all three types of debt securities.
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Instruction: Answer for querstion no 1 and peer review for question no 2.
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