Question

Indicate how unrealized holding gains and losses should be reported for investment securities classified as trading, available-for-sale, and held-to-maturity?

1) As part of the income statement
2) As part of the balance sheet
3) As part of the statement of cash flows
4) Cannot be determined

Answer 1

Unrealized holding gains and losses for investment securities are reported differently based on their classification. For trading securities, they are reported in the income statement. For available-for-sale securities, they are reported in the balance sheet. For held-to-maturity securities, they are not reported.

Step-by-step explanation:

Unrealized holding gains and losses for investment securities are reported differently based on their classification.

1) For investment securities classified as trading, unrealized holding gains and losses are reported as part of the income statement. This means that any changes in the fair value of the securities will directly affect the company's earnings.

2) For investment securities classified as available-for-sale, unrealized holding gains and losses are reported as part of the balance sheet. These gains and losses are recorded as a separate component of other comprehensive income, which is then reported in the equity section of the balance sheet.

3) For investment securities classified as held-to-maturity, unrealized holding gains and losses are not reported as they are held with the intention of maturity and not for the purpose of trading or sale.

Therefore, the correct option is 2) As part of the balance sheet.