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CPAstdy
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Joined: 22 May 2008
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Posts: 72

Posted: 15 Jan 2009 at 00:49 \| IP Logged

Hi,

According to Becker book chapter 3 (F3-4) "All realized gains or losses are recognized on the Income Statement as the difference between the ORIGINAL COST of the security and the proceeds on disposal regardless of the classification of the security."

BUT on one of the mcq (CPA-00521), the explanation answer to the mcq says "RULE: Trading securities are reported at fair value with unrealized gains and losses included in earnings. Fair value becomes the new basis (revalued cost) for computing realized gains or losses upon sale."

So my questions which one should I follow?

Thanks!

qualler
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Joined: 13 Jan 2009
Location: United States
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Posts: 153

Posted: 15 Jan 2009 at 10:25 \| IP Logged

Here's the difference -- REALIZED gains are included on the income statement regardless of whether you sold a trading security, available-for-sale security, and held-to-maturity security because you are REALIZING the profit on the sale. However, TRADING SECURITIES are in essence "marked-to-market" every year, with the UNREALIZED gain/loss recorded on the income statement every year. Available-for-sale and held-to-maturity securities are NOT marked-to-market every year, but when you sell them, you do realize a gain.

Does that make sense? I'm studying for FAR too and trying to answer these types of questions in my own words.

CPAstdy
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Joined: 22 May 2008
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Posted: 15 Jan 2009 at 11:22 \| IP Logged

So does that mean only the trading securities used the new Fair value when- disposing it and not available for sale or held to maturity?

When is your test?

qualler
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Joined: 13 Jan 2009
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Posts: 153

Posted: 15 Jan 2009 at 11:29 \| IP Logged

Yes -- the cost basis of trading securities becomes whatever the FMV is that it was most recently marked-to-market to, since you have recognized that unrealized change on your income statement already.

I take mine on January 23 (8 days from today!) so I am trying to make sure I have an understanding of the concepts in my own head. I am signed up to do the 2-day FAR review this weekend from Yaeger CPA review and feel like I'll have a good idea of whether or not I'm really ready after taking that.

When are you testing?

CPAstdy
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Joined: 22 May 2008
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Posts: 72

Posted: 15 Jan 2009 at 11:49 \| IP Logged

Tomorrow. I'm just going through those confusing questions right now. Hopefully i pass the test this time and ready for it.

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