Unrealized gains and losses on trading securities

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  • #180074
    calicpa
    Participant

    do these create DTLs or DTAs? the gains get recognized on the income statement so you have to pay tax on them, correct? which would create a DTA? idk

    BEC - 84, 4/6/13
    AUD - 77, 5/28/13
    REG - 83, 4/12/14
    FAR - 83, 10/3/13

    Ethics - 90% 4/24/13

    150 unit education requirement met!
    Work experience met!

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  • #435088
    calicpa
    Participant

    bump

    BEC - 84, 4/6/13
    AUD - 77, 5/28/13
    REG - 83, 4/12/14
    FAR - 83, 10/3/13

    Ethics - 90% 4/24/13

    150 unit education requirement met!
    Work experience met!

    #435089
    joelseph
    Participant

    You're overcomplicating it. TS hit the income statement, not OCI.

    Trading Securities = Investment = Asset

    There is no balance sheet deferral or liability.

    Original Entry:

    DR: Investment CR: Cash (or Equity if owner contributed)

    Period Entry:

    Gain: DR: Investment CR: Other Expense (Income) Account

    Loss: CR: Investment DR: Other Expense (Income) Account

    Assuming you are a C-Corp your NI will be taxed and Gain/Loss on the TS will factor into NI.

    DTA or DTL are created from timing differences between tax / financials… like different methods of depreciation.

    FAR: 84 on 4/4/13
    AUD: 91 on 7/27/13
    BEC: 72 on 11/11/13, 82 on 01/03/14
    REG: 80 on 02/27/14

    #435090
    Jennifer241
    Member

    Here is how to remember deferred tax assets and liabilities (DTA, DTL). Items that create a temporary difference, and are good for the financial statements create DTLs. Items that are bad for the financial statements create DTAs.

    Items that are good for the financial statements that create DTLs are accelerated depreciation for tax (more income for book), installment revenue or percentage of completion revenue (recognized on accrual basis for book and cash basis for tax, so there is more income in the financials). Equity method income also creates DTAs because they are recognizable in the financials on the accrual basis and are only recognizable for tax when dividends are received, subject to the dividend received deduction.

    Items that are bad for the financials and create DTAs are warranty accruals (recognized on accrual basis for book and cash basis for tax, so there is less income in the financials) and early payments by customers/renters (early payments create a deferred revenue liability and liabilities are “bad”).

    So, remember – good for the financial statements gives us DTLs and bad for the financial statements gives us DTAs.

    For taxable treatement – You won't pay tax on a security until it is sold, period. The adjustments that are made for unrealized gains and losses are for “book” adjustments, it records the financial statements at FMV, not at Tax. Often times a company's book income is different than their taxable income.

    AUD - Jan 9,13 Pass
    REG - Aug 30,13 Pass
    BEC - Oct 26,13 Pass
    FAR - Dec 4,13 Pass

    Licensed CPA in the state of Oregon

    #435091
    joelseph
    Participant

    “For taxable treatement – You won't pay tax on a security until it is sold, period.”

    This isn't true for a Trading Security. The gain/loss each period will affect NI which will affect your tax.

    FAR: 84 on 4/4/13
    AUD: 91 on 7/27/13
    BEC: 72 on 11/11/13, 82 on 01/03/14
    REG: 80 on 02/27/14

    #435092
    calicpa
    Participant

    recognized a $2,000 unrealized gain on trading securities purchased during the current year

    this doesn't create a DTL?

    BEC - 84, 4/6/13
    AUD - 77, 5/28/13
    REG - 83, 4/12/14
    FAR - 83, 10/3/13

    Ethics - 90% 4/24/13

    150 unit education requirement met!
    Work experience met!

    #435093
    Jennifer241
    Member

    Unrealized gains and unrealized losses are often called “paper” profits or losses, since the actual gain or loss is not determined until the stock is sold.

    You asked “gains get recognized on the income statement so you have to pay tax on them, correct? ” I was informing you that the stock has NOT been sold, therefore you do NOT have to pay the tax on it until it is sold. You can still record the stock on your books at FMV, but the tax is not paid until it is sold.

    “this doesn't create a DTL?” I am not studying FAR right now, so I cannot help you on the specifics of this, but I will try.

    If your investment in AFS increased by $100,000 then you would report the unrealized gain:

    Dr. Investment 100,000

    Cr. OCI 100,000

    and,

    Dr. OCI 30,000 (Tax effect, assuming a 30% tax rate)

    Cr. Deferred Tax Liability 30,000

    AUD - Jan 9,13 Pass
    REG - Aug 30,13 Pass
    BEC - Oct 26,13 Pass
    FAR - Dec 4,13 Pass

    Licensed CPA in the state of Oregon

    #435094

    unrealized holding gains and losses create deffered tax consequences.

    Unrealized gains create a liability because we report the income now, but it will be taxed later.

    Unrealized losses create an asset because we report the loss now, but will take a deduction for it later.

    If they were available for sale, the deffered taxes would be recognized in OCI like the gains and losses.

    ALL 4 parts passed summer 13
    Ethics October 13
    Experience (waiting)

    Becker Only

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