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Unrealized Gains and Losses for Trading Securities (1)

Brian Krogol
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So we've talked about unrealized gains and losses a little bit so far, and we're gonna have to be adjusting our our value of the investment based on the fair value, right? And this is going to happen on the reporting dates. So if say we bought, for example, this investment we bought in November and now it turns to be the end of the year. Now it's December 31 and we're about to release our balance sheet. Well, we have to update the value of the investment based on the balance sheet date for these trading securities. Okay. And I want to make a note because this is the difference between this is the main difference between a trading security and available for sale security is where we put the unrealized gains and losses for the trading securities. They're gonna show up on the income statement. Okay, So nothing too crazy when it comes to trading securities, it just shows up on the income statement, like we're used to, Okay, so when do we show a gain or a loss? Well, we show a gain if the price has increased since we bought it, right? We bought it at a lower price and now it's worth more. Well, we have a gain and the opposite. If we bought it at a high price and it fell, that would be a loss. So if the market price of the investment has increased since the last, since the last valuation, then we have an unrealized gain. Okay, Because at this point why we say it's unrealized is because we haven't sold the investment, we're still holding it. We haven't realized this gain, realizing it is when we sell the investment and we actually have this gain happen because we no longer own the investment. It's unrealized when it's just a change in value while we're still holding it. Think about maybe some stock that you've bought in the past, maybe you're a savvy investor and you've bought some stock and you're just sitting on the stock, you've seen that it's gone up in value but you haven't sold it yet. Well, you have unrealized gains on that investment. Okay. So if the market price has decreased, well that's the opposite, right? If the market price has decreased since the last revaluation and I say last revaluation because this might not be the first time that we're revaluing it to fair value. We're gonna be constantly doing this every time we release financial statements. Okay, so in this case we would have an unrealized loss. So we're gonna have to keep track of what the value of the investment is and keep track of those changes in the value. Okay, So let's let's do an example here on december, 31st year one X, Y. Z. Company's stock had a market value of $65 per share. So the market value of the stock had increased, right? We had originally purchased 500 shares At a price of $60, right? And that came out to 30,000 was our original investment, but now those $60, those 500 shares are no longer worth $60. If we chose to sell those investments today, we would get $65 per share, not just 60. Right? So there's an unrealized gain in this situation. The price has gone up since we purchased them. So we have to find out what is the amount of the unrealized gain? It's not gonna be the total amount of what it's worth now. It's gonna be the change from what it was worth before to what it's worth now. So let's see what it's worth now. 500 shares, times $65 Right? That's what it's worth. Now, let me get out my calculator. No need to do difficult math. 500 times 65. That comes out to 32,000 500. Okay, 32,500 is what it's worth now. So clearly, we have an unrealized gain, right? This investment has increased in value, but it's not like we received cash or anything, there's no receipt of cash. So what we want to do is we're gonna adjust the value of the investment right now, the investment is sitting on our books for 30,000. What we want to change it so that it shows that the value is 32,500. So what we're gonna do, Notice that the difference between these two, the difference between them is 2500. Right? That's the change in fair value. So it was sitting on our books for 30,000. But we wanted to say on our books that it's 32,500. So this change in the fair value. That's what we want to put into our journal entry. So what we're gonna do is we're going to debit the investment. So, remember we had our investment in in trading securities. This is the asset that we created when we first purchased the investment in our first journal entry. We have debited the investment for 30,000 because that's what we paid for it. Well, now we're debating it again to increase the value up to the fair value. So we're going to debit it by 2500. Okay. And the credit in this situation? Well, the credit is going to be the unrealized gain. So, remember, we're gonna have an unrealized gain and this unrealized gain, I'm gonna put it here that it goes to the income statement, right? Because we're gonna have a situation when we deal with available for sale securities, that they don't go to the income statement. They go to other comprehensive income. But for trading securities, it's just on the income statement. And it would show up generally in that same section where we show dividend revenue after our operating right? This is this is a non operating thing again, because this isn't part of our core business. This will show up after our operating income in that other section where we show other things that were involved in. Cool. So we're gonna increase the value of our investment. So our assets go up By 2500 and we're gonna have an unrealized gain, and this is part of equity, right? This is going to our income statement and it's increasing our income. Mhm. So the unrealized gain is going to increase our income, which increases our equity 2500 there as well. Okay, I'll scroll down a little bit so you can see that. Alright, so we're gonna have an increase in assets increase in equity, and that's our journal entry. We need to find what the change in the fair value was, and we're gonna have to adjust our investment account to that change in fair value. Cool. Alright. Let's pause here and then we'll continue with these T accounts down below