Contingent Liabilities

Reasons companies buy stock of others

Store excess cash earn dividends or gains influence another company or gain control

Trading security definition

Short-term equity investment intended for near-term resale

Initial reporting of trading security

Recorded at historical cost on acquisition date

Dividend from trading security

Recorded as dividend revenue on income statement

Sale of trading security

Gain or loss reported based on difference between sale proceeds and carrying amount

Year-end reporting of trading securities

Shown at fair value not historical cost

Unrealized gain/loss

Change in fair value reported in net income even if not sold

Why fair value used for trading securities

Objective market value easily sold short holding period

Example of unrealized gain

Cost 25000 fair value 28000 → 3000 unrealized gain in net income

Example of unrealized loss

Cost 25000 fair value 21000 → 4000 unrealized loss in net income

Sale after fair value adjustment

Compare sales price to adjusted carrying value recognize gain or loss

Example of sale

Carrying value 28000 sold 27000 → 1000 loss in current year

Overall gain vs period reporting

Total gain is spread across years unrealized gains or losses recognized annually

Key takeaway

Trading securities are always at fair value with gains or losses in income dividends as revenue sales based on current carrying value