Trading Securities
1. Realize that the reporting of investments in the ownership shares of another company depends on the purpose of the acquisition.
2. Explain the characteristics of investments that are classified as trading securities.
3. Account for changes in the value of investments in trading securities and understand the rationale for this handling.
4. Record dividends received from investments classified as trading securities.
5. Determine the gain or loss to be recorded on the sale of a trading security.
Question: Businesses frequently acquire ownership (equity) shares of other companies. On June 30, 2009,
Microsoft disclosed that it held investments in the stock of other companies with a value of over $4.4 billion.
During 2008, Mars Inc. offered to buy all the ownership shares of Wm. Wrigley Jr. Company for approximately
$23 billion. The acquisition of Merrill Lynch by Bank of America made headlines around the world in the fall
of 2008. The purchase of such shares offers many potential benefits. What are the most common reasons for one
company to buy the ownership shares of another company?
Answer: Potentially, many benefits can accrue from obtaining shares of the stock issued by a business. The
method of financial reporting applied by the owner depends on the purpose for holding such investments. Thus,
the accounting process here is unique. The reporting of most assets does not vary significantly because of the
rationale for making the purchase and retaining the property. In contrast, information about the ownership of the
stock of another company is presented according to one of several methods based solely on the reason for the
investment.
