Q1CA - Horngren'S Financial And Managerial Accounting

Question

In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.

Step-by-Step Solution

Answer

Points of difference are:

1. Reporting unrealized gains.
2. Reporting on Balance Sheet.
3. Holding Period.

Step 1: Definition of Long-Term Assets

The assets with a holding period of more than one year are known as long-term assets. These assets include plants, buildings, and machinery.

Step 2: Difference between trading debt investment and available-for-sale debt investment

Reporting Unrealized Gains: The unrealized gains/losses generated from holding the trading debt investment are included in the net income of the business entity. While the unrealized gains/losses from available-for-sale debt securities are reported in the equity section as other comprehensive gains. 

Reporting on Balance Sheet: Trading debt investment is always reported as a current asset on the balance sheet. While available for sale, debt investments are reported as current or long-term assets according to the intention of management. 

Holding Period: Trading debt investments are held for a very short period, such as within days, months, or weeks. While the available-sale securities are held for a slightly longer period and are sold within one year.