How is the realized gain or loss calculated for trading debt securities when sold?

• A. Based solely on the original cost
• B. Using the selling price compared to the adjusted cost
• C. Based on the fair value only
• D. Using book value exclusively

Answer: (B)

The realized gain or loss on trading debt securities when sold is determined by comparing the selling price to the adjusted cost of the security. The adjusted cost includes the original purchase price adjusted for any changes in value that may have occurred prior to the sale. This typically includes any impairment losses that have been recognized and any interest income that has been accrued over the holding period.

When a trading security is sold, the amount received (the selling price) is subtracted from this adjusted cost basis to calculate the gain or loss. A gain occurs when the selling price exceeds the adjusted cost, while a loss occurs when the selling price is less than the adjusted cost.

This approach ensures that the gain or loss reflects the true economic performance of the investment, taking into account not just the initial cost but also any adjustments that may have influenced the security's value. Therefore, using the selling price compared to the adjusted cost appropriately captures the economic reality of the transaction.