Trading securities in the current assets section have a fair value that is $4,200 lower than cost.
In this situation, the trading securities for Warren Co. appear to not be doing very well. This is because there is an unrealized holding loss on income of $4,200. This shows that these securities are below the price the company originally paid for them. Below is an example of what the journal entry would look like to represent this loss.
Unrealized Holding Gain or Loss $4,200
Fair Value Adjustment $4,200
A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.
In the situation when a trading security, whose fair value is currently less than cost, is transferred to the available-for-sale category, the carrying value of the security will decrease because the fair value is decreased and the adjustment is needed to reflect the change. In addition, there will be change in earnings amount on the income statement. Because the fair value of the security is less than its cost, the fair value adjustment will result in unrealized holding loss. Unrealized holding losses are included in the income when change in trading securities account occurs. Unrealized holding losses, however, are not included in the income when a change in available-for-sale securities account occurs, as the change is reported as other comprehensive income. As a result of the transfer of the trading security to the available- for-sale category, the income recorded is increased, as the unrealized holding loss will not be a part of the net income once the trading security will go to the available-for-sale category.
An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.
In the situation when an available-for-sale noncurrent security, whose fair value is currently less than cost, is to be reclassified...