 Hello and welcome to this session in which we will discuss trading securities. Under the umbrella of investments we can break down our investments under debt investments and equity investments. Under debt investments we could have three categories health to maturity, why because bonds could be held to maturity until they mature available for sale and we already covered this category health to maturities and we already covered available for sale categories. In this session we will be looking at trading securities trading securities is only available for debt securities debt securities are US government municipal bond corporate bonds convertible that so on and so forth. We don't discuss any equity that when it comes to trading securities it was an old category that's no longer available. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures multiple choice questions true false questions as well as exercises. Go ahead start your free trial today no obligation no credit card required. So what are trading securities trading securities are securities investments that you plan to sell soon simply put you are flipping flipping means you want to buy them sell them in the near future to make a profit. They are reported through fair using fair value through net income. Fair value means what fair value means the investment might go up in value the investment might go down in value and as a result you have to report increases and decreases the question is where do you report those increases and decreases well if it's a trading securities and remember only that only that can be classified as trading securities any adjustment goes into net income in contrast now why am I emphasizing this point in contrast to securities that we consider available for sale which is a different category it doesn't go into net income so this is not available for sale we are dealing with trading securities so trading securities fair value through net income any discount any or premium is amortized because it's a bond any interest revenue is reported on the income statement because bonds would have interest revenue and we will report the interest revenue on the income statement the best way to illustrate the concept of trading securities is to take a look at an example this is a trading debt securities portfolio we have three investments the economic integration forum we paid 40 000 for it youtube corp we paid 180 bonds and Lenovo bonds we paid 36 the fair value of the economic integration is 41 so we have a plus a thousand youtube is a loss we bought it at 180 it's 173 loss of seven and the cost of the Lenovo we paid 36 the value is 46 we have a gain of 10 overall if we net them out we have a gain of 4 000 so the total fair value is 260 the total cost is 256 as a result we have a gain of 4 000 just to make it simple we have no prior adjustment simply put this is the first year now we need to do what mark our investment mark our portfolio to market mark our investment to market so how do we do that remember we learned this in the prior session it's the same concept we're going to have an account called fair value adjustment and we're going to have an account called unrealized holding gain or loss now specifically i'm going to emphasize this point i'm going to use it in different color this is an income account so it's unrealized holding gain slash loss income i'm going to emphasize income now what did we learn and available for sale how to adjust a portfolio it's the same concept if we have a gain if we have a gain it means we're supposed to have a debit balance and fair value adjustment for the amount of the net gain which is 4 000 now the prior gain is zero because we have no prior adjustment therefore the adjustment is debit fair value adjustment 4 000 and for any debit the corresponding any debit any adjustment the fair value the corresponding is unrealized holding gain or loss so if we debited this we are going to credit unrealized holding gain or loss and we have a 4 000 is a debit balance which is a gain and 4 000 unrealized holding gain or loss matches our 4 000 gain our 4 000 gain our 4 000 gain that we reported let's take a look at the journal entry debit fair value adjustment 4 000 credit unrealized holding gain loss income 4 000 remember the only reason the gain and the adjustments are the same because we had no prior adjustment remember if we have a prior adjustment the entry might be a little bit more involved and i'm not going to go over this because i'm keeping this example simple i looked at this in the prior session when we looked at available for sale and we would look at trading trading securities fair value adjustment from year to year in a different session now let's take a look at future scenarios adam sold the economic integration for a march 1st 20x1 so what we did we took this investment this bond and we sold it for 42500 at at at that time the amortized cost was 40 000 now we need to process the entries now i'm gonna show you two type of entries you can do to to make the sale your cpr view course or your intermediate accounting book might show you one or the other they're both the same but they break it differently the first thing the first method is i'm gonna adjust my bond to market what does that mean it means look i sold it for 42 500 it means this bond went from 41 by the time i sold it went to 42 500 i'm gonna write it up i'm gonna debit fair value adjustment 1500 credit unrealized holding gain loss income of 1500 so first thing i'm gonna write it up then i'm going to sell it and get the cash i'm gonna debit cash for what what i sold it for 42 500 credit fair value fair value investment 2500 and debit the credit the investment so i got rid of the investment i received the cash so now i need to explain what is this credit the fair value adjustment remember in the prior year we had 4000 and fair value adjustment this 4000 include a thousand from this bond then we added an additional 1500 so this bond has an fair value adjustment 2500 which since i'm selling the bond i have to remove the bond so that's one way of booking the transaction the other way to book the transaction is not to bring it up to date what does that mean means i'm gonna receive the cash for 2500 i'm going to remove the fair value investment remember this 4000 has a thousand for the economic integration bonds i'm gonna remove that i'm gonna credit my investment 40 000 i have to get rid of my cost i have to get rid of the thousand now i have to book also a gain of 1500 and this gain since the beginning of the year since the beginning of the year the value of the bond went from 41 to 42 500 went up by 1500 i have a realized gain on the sale of 1500 so once again the concept is the same we end up in the same place the total gain is 2500 for the whole life of the bond the same amount of cash and we remove the bond but you could see it differently make sure you understand how to treat this transaction from a two different perspective what should you do now go to farhat lectures and work mcqs and look at additional resources especially looking to adjust your portfolio from year to year that's important that's an important concept good luck study hard invest in yourself and invest in your 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