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Chapter 10: Q1CA (page 577)

In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.

Short Answer

Expert verified

Points of difference are:

  1. Reporting unrealized gains.
  2. Reporting on Balance Sheet.
  3. Holding Period.

Step by step solution

01

Definition of Long-Term Assets

The assets with a holding period of more than one year are known as long-term assets. These assets include plants, buildings, and machinery.

02

Difference between trading debt investment and available-for-sale debt investment

Reporting Unrealized Gains: The unrealized gains/losses generated from holding the trading debt investment are included in the net income of the business entity. While the unrealized gains/losses from available-for-sale debt securities are reported in the equity section as other comprehensive gains.

Reporting on Balance Sheet: Trading debt investment is always reported as a current asset on the balance sheet. While available for sale, debt investments are reported as current or long-term assets according to the intention of management.

Holding Period: Trading debt investments are held for a very short period, such as within days, months, or weeks. While the available-sale securities are held for a slightly longer period and are sold within one year.

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Most popular questions from this chapter

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon鈥檚 voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock.

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Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon鈥檚 voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future.

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Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

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Boston Today Publishers completed the following investment transactions during 2018 and 2019:

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Dec. 6 Purchased 2,500 shares of Loveable stock at a price of \(24.00 per share, intending to sell the investment next month. Boston did not have significant influence over Loveable.

23. Received a cash dividend of \)1.50 per share on the Loveable stock.

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