Question

Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders’ equity and income.

Short answer

Stockholders’ income and their equity directly depend on the sale of the securities. Based on the sale, the stockholder’s equity is increased or decreased.

Step-by-step solution

Definition of stockholder’s equity

The amount invested by the company owners in the company is known as the stockholder’s equity.

Impact on stockholder’s equity and income

Whenever any security is transferred to another security, this transaction is firstly recorded on the fair value. If there is any unrealized profit and loss in the transfer, it affects the stockholder equity. If there is a transfer of security, then the shareholder equity increases. On the other hand, if there is a loss in the transfer, then shareholder’s equity decreases. The amount of loss and gain on the transfer of the security is known as the income of the company.