A company's unrealized gains and losses on its investments reflect price changes.
An unrealized gain or loss is the change in fair market value of certain investments that a company owns. A company must report these changes and the fair market value of these investments every accounting period while the company owns the investments. Unrealized gains and losses from trading securities, which are investments a company plans to resell in a short period, affect a company's earnings on its income statement. Unrealized gains and losses from available-for-sale securities, which are investments that can't be classified as one of the company's other investment categories, affect a company's stockholders' equity on its balance sheet.
Instructions
Trading Securities
1. Determine the amount of a company's unrealized gains or losses from trading securities for an accounting period and the fair value of the trading securities at the end of the accounting period.
2. Write "Unrealized holding gain/loss on investments" and the dollar amount of unrealized gains or losses from trading securities for the accounting period as a line item in the revenue section of the income statement. Enclose the amount in parentheses to designate a loss if the amount is negative.
3. Write "Trading securities" and the dollar amount of the fair value of the securities at the end of the accounting period as a line item below the "Cash" line item in the current assets section of the balance sheet.
Available-for-Sale Securities
4. Determine the amount of a company's unrealized gains or losses from available-for-sale securities for an accounting period, the fair value of the securities at the end of the accounting period and the amount of accumulated other comprehensive income or loss at the end of the prior accounting period.
5. Add the amount of unrealized gains, or subtract the losses, from the amount of accumulated other comprehensive income or loss at the end of the prior accounting period. For example, subtract $100,000 in unrealized losses from $500,000 in accumulated other comprehensive income at the end of the prior accounting period, which equals $400,000 in accumulated other comprehensive income at the end of the current accounting period. This amount includes the cumulative unrealized gains and losses from current and prior periods.
6. Write "Accumulated other comprehensive income/loss" and its dollar amount at the end of the current accounting period as a line item below "Retained earnings" in the stockholders' equity section of the balance sheet. Enclose the account balance in parentheses to designate a loss if the amount is negative. In the example, write "Accumulated other comprehensive income/loss" and "$400,000."
7. Write "Available-for-sale securities" and the dollar amount of the fair value of the securities at the end of the accounting period as a line item in the long-term investments section of the balance sheet to record the current fair market value of available-for-sale securities.
