Investments, either short or long-term, represent placements that the company makes to obtain a return on them or receive dividends that help increase the capital of the company. Short-term investments, if you like, are placements that are practically effective at any time, unlike long-term investments that represent a little more risk within the market.
Although the market price of a bond can fluctuate from day to day, you can be sure that when the maturity date arrives, the market price will equal the maturity value of the bond. Stocks, on the other hand, have no expiration values. When the market price of a stock falls, there is no certain way to tell whether the decline will be temporary or permanent. For this reason, different valuation standards are applied to account for investments in marketable debt securities (bonds) and in marketable equity securities (stocks).
When the bonds are issued at a discount, the maturity value of the bonds will exceed the value originally loaned. Therefore, the discount can be considered as an interest charge included in the maturity value of the bonds. The amortization of this discount over the life of the bond issue increases the periodic interest expense.
INVESTMENTS
They represent placements of money on which a company expects to obtain some future return, either through the realization of an interest, dividend or by selling at a higher value at its acquisition cost.
TEMPORARY INVESTMENTS.
Temporary investments generally consist of short-term documents (certificates of deposit, treasury bonds, and negotiable documents), negotiable debt securities (government and company bonds), and negotiable equity securities (preferred and common stocks), purchased with cash that it is not needed immediately for operations. These investments can be held temporarily, rather than having the cash, and can be quickly converted to cash when current financial needs make that conversion desirable.
LONG TERM INVESTMENTS.
They are money placements in which a company or entity decides to maintain them for a period greater than one year or the cycle of operations, counting from the date of presentation of the balance sheet.
DIFFERENCES BETWEEN TEMPORARY INVESTMENTS AND LONG-TERM INVESTMENTS.
| Temporary investments | Long-term investments |
| They consist of short-term documents | They are placements of money in terms of more than one year. |
| Shares sell more easily. | Shares acquired in exchange for securities that are not cash. |
| They become cash when needed. | They are not readily available because they are not made up of cash but of goods. |
| Permanent investment transactions must be handled through checking accounts. | The main objective is to increase your own profit, which you can achieve 1) directly through the receipt of dividends or interest on your investment or by increasing the market value of your securities, or 2) indirectly, creating and ensuring good investment relationships. operation between companies and thus improving the return on your investment. |
| They consist of short-term documents (certificates of deposit, treasury bonds and negotiable documents) | They consist of company securities: bonds of various types, preferred stocks and common stocks. |
OBJECTIVES OF THE INVESTMENT IN NEGOTIABLE SECURITIES.
The term “marketable securities” basically refers to US government bonds and the bonds and stocks of large corporations. Indeed, investments in securities are often referred to as "secondary money reserves." If money is wanted for any operational purpose, these securities can be quickly converted to cash; In turn, investments in marketable securities are preferable to cash because they produce income or dividends.
When an investor owns several different marketable securities, this group of securities is called an investment portfolio (portfolio). When deciding on the securities to include in the portfolio, the investor seeks to maximize return and minimize risk.
The Financial Accounting Standards Board has determined that a company can separate its marketable securities into two groups: temporary investments classified as non-current assets, and long-term investments classified as non-current assets. Those marketable securities that management intends to hold in the long term can be listed on the balance sheet under the current assets section under the heading Long-term investments. In most cases, however, management keeps its negotiable securities available for sale whenever the company needs them or to exchange them for others that offer greater advantages. Therefore, marketable securities are generally considered current assets.
DIFFERENCES IN THE VALUATION RULES OF THE INVESTMENT IN OBLIGATIONS AND THE INVESTMENT IN SHARES.
Although the market price of a bond can fluctuate from day to day, you can be sure that when the maturity date arrives, the market price will equal the maturity value of the bond. Stocks, on the other hand, have no expiration values. When the market price of a stock falls, there is no certain way to tell whether the decline will be temporary or permanent. For this reason, different valuation standards are applied to account for investments in marketable debt securities (bonds) and in marketable equity securities (stocks).
Valuation of negotiable debt securities.
A short-term investment in bonds is generally kept on the books at cost and a gain or loss is recognized when the investment is sold. If bonds are held as a long-term investment and the difference between the cost of the investment and its maturity value is substantial, the valuation of the investment is adjusted each year by amortizing the discount or premium.
Valuation at negotiable equity values.
The market values of stocks can rise or fall dramatically during an accounting period. A trader who sells an investment at a price above or below cost must recognize a gain or loss on the sale. The FASB has ruled that a portfolio of marketable equity securities must be shown on the balance sheet for the lower of aggregate cost or current market value. The effect of this cost or marketing rule, the lower is to recognize losses from falls in market value without recognizing gains from increases in market prices. Accountants have traditionally applied different criteria to recognize profit or loss.One of the basic principles of accounting is that profits should not be recognized until they have been realized, and the usual test of realization is the sale of the asset in question. Losses, on the other hand, are recognized as soon as the objective test indicates that a loss has been incurred.
When securities are purchased, an account called marketable securities is debited for the full purchase price, including any commission to brokers and transfer taxes. An auxiliary ledger must be kept that shows each security owned with acquisition date, total cost, number of shares (or bonds), and cost per share (or bond). This auxiliary ledger provides the information necessary to determine the value of the profit or loss when the investment in stocks or bonds is sold. The main difference between registering a bond investment and a stock investment is that the interest on the bonds accrues day by day. When bonds are purchased between interest dates, the buyer pays for the bond at the quoted market price plus the interest accrued since the last date of the interest payment.Through this arrangement, the owner acquires the right to receive the entire next semiannual interest payment. An interest receivable account on bonds must be debited for the value of the interest purchased. Dividends in shares, however, do not accumulate and the entire purchase price paid by the investor in shares is recorded in the negotiable securities account.
Income from investments in bonds.
Suppose that on August 1 an investor buys 10 bonds of $ 1,000 of 9%, and pays interest on June 1 and December. The investor buys the bonds on August 1 at a price of $ 98, plus a brokerage commission of $ 50 and two-month accrued interest of $ 150 (10,000 x 9% x 2/12 = $ 150). The entry on August 1 to register the investment is:
Marketable securities $ 9,850
Interest to collect on bonds 150
Cash $ 10,000
P / R Purchase of ten 9% bonds from the Rider company at 98 plus a brokerage commission of $ 50 and accrued interest in two months.
On December 1, the semi-annual interest payment date, the investor will receive an interest check for $ 450, which will record as follows:
-one-
Box 450
Interest receivable on bonds 150
Interest income on bonds 300
P / R collected semiannual interest on the bonds of the Rider company.
The $ 300 credit to bond interest income represents the value actually earned over the four months you owned the bonds (9% x $ 10,000 x 4/12 = $ 300). If the investor's accounting records are maintained on a calendar-year basis, an adjusting entry must be made as of December 31 to record the interest earned on bonds since December 1.
-one-
Interest to collect on bonds 75
Interest income on bonds 75
P / R accrual of interest earned for one month (Dec 1 - Dec 31) on Rider company bonds ($ 10,000 x 9% x 1/12 = $ 75)
ACCOUNTING RECORD OF INVESTMENTS IN SHARES AND OBLIGATIONS.
The equity investments.
The cost method is applicable to passive investments in unrealizable speculative securities, such as shares in a restricted ownership company. Such investments have no market value and cannot be classified as current except when their sale is imminent.
The investment is originally recorded at the cost of the shares acquired but is then adjusted in each period according to changes in the net assets of the company where the investment was made. That is, the book value of the investment increases (decreases) periodically, according to the share that the investor has in the profits (loss), and decreases in amounts equal to all the dividends that the investor receives from the company.
The equity method recognizes the fact that the company's earnings increase the company's net assets, which is the basis of the investment; and that losses and dividends decrease this net asset.
The use of dividends as a basis for recognizing profit poses an additional problem. For example, suppose the company declares a net loss but the investor uses his influence to demand the payment of a dividend. In this case the investor declares a profit even when the company is suffering a loss. In other words, if dividends are used as the basis for recognizing profit, the economic situation is not correctly displayed.With the participation method, the investor's periodic income is made up of the proportional part of the profits of the company where he invested (adjusted to eliminate gains and losses between the companies) and the amortization of the difference between the initial costs of the investor and his part proportional to the book value of the company invested in on the acquisition date. And if the net income of the company where the investment was made includes extraordinary items, the investor treats the proportional part of them as extraordinary items and not as ordinary income from an investment before extraordinary items.the investor treats the proportional part of them as extraordinary items and not as ordinary income from an investment before extraordinary items.the investor treats the proportional part of them as extraordinary items and not as ordinary income from an investment before extraordinary items.
ACCOUNTING REGISTER.
-one-
Investment in shares xxx
Cash xxx
P / R Stock acquisition record
-two-
Cash xxx
Investment in shares xxx
P / R Record of dividends received
-3-
Investment in shares xxx
Loss on investment (extraordinary) xxx
Investment Income (ordinary) xxx
P / R Record of participation in ordinary profit and extraordinary loss.
-4-
Cash xxx
Investment in shares xxx
P / R Record of dividends received
-5-
Investment Income (ordinary) xxx
Investment in shares xxx
P / R Record of the amortization of the investment cost in excess of the book value, represented by: Devalued depreciable assets Unrecorded capital gain.
Sometimes an investor can purchase an investment at a cost less than the basic book value.
The losses of the company in which it is invested exceed the book value.
If the investor's share of the company's losses exceeds the carrying amount of the investment, the question arises as to whether the investor should recognize any additional losses. Generally, the investor should discontinue the application of the equity method and not recognize additional losses.
If the possible loss of the investor is not limited to the amount of its original investment (by guarantee of the obligations of the company in which it invests or other commitment to provide additional financial support), or if the return of the company to productive operations seems imminent, it is correct that the investor recognizes additional losses.
ACCOUNTING TREATMENT FOR OBLIGATIONS ACQUIRED WITH A PREMIUM OR DISCOUNT.
For the amortization of Premiums and Discounts of the Bonds there are two methods to amortize the premiums and discounts of the bonds: 1) the straight line method and 2) the effective interest method.
Straight-line amortization of the award.
(Nominal Value x Interest Percentage) / 12 Months or (Time specified in the interest rate.) The result is multiplied by the number of months that will elapse.
Seating:
-1-
Investments in Bonds xxx
Interest Received xxx
Cash xxx
P / R Record of the purchase of the bonds.
-two-
Cash xxx
Investments in Bonds xxx
Interest received xxx
P / R Amortization of the premium through the account investments in Bonds
-3-
Interest receivable on bonds xxx
Investment in bonds xxx
Interest received xxx
P / R Adjusting entry.
-4-
Cash xxx
Investments in bonds xxx
P / R Entry at maturity date.
-5-
Interest x collect on bonds xxx
Interests received xxx
Investments in bonds xxx
P / R Record of accumulated interest and amortization of the award in separate entries.
Amortization (accumulation) of the Discount.
If bonds are purchased at a discount (less than their face value), the amortized discount is added to the interest received.
Seating:
-1-
Investment in bonds xxx
Interest received xxx
Cash xxx
P / R Purchase Record
-2-
Cash xxx
Investment in bonds xxx
Interest received xxx
P / R Record of interest received.
Effective Interest Method.
The straight-line method produces a constant interest income, but it also produces a variable rate of return on the book value of the investment. Although the effective interest method results in a variable amount that is recorded as interest received from period to period, its virtue is that it produces a constant rate of return on the book value of the investment.
The effective interest method is mandatory, except when another, such as the straight-line method, of a similar result. Although the calculations for the effective interest method are more complex, it is widely used today because of the widespread use of calculators and computers.
The effective interest method is applied to bond investments in a similar way to that described in previous paragraphs for bonds payable. The effective interest rate or yield on the investment date is calculated and applied to the initial book value of the investment for each interest period. In each period the book value of the investment increases or decreases due to the amortization of the premium or the discount.
Seating:
-1-
Cash xxx
Investments in bonds xxx
Interest Received xxx
P / R Record of the first semi-annual payment
Sale of bonds before maturity.
If the bonds that are carried as long-term investments are sold before maturity, entries must be made to amortize the discount or premium on the sale date and to remove the book value of the bonds sold from the Investments account..
-one-
Interest on bonds xxx
Interest received xxx
P / R Entry to amortize the discount
-2-
Cash xxx
Interests received xxx
Investments in bonds xxx
Gain on sale of bonds xxx
P / R Record of the sale.
ACCOUNTING RECORD OF THE CONVERSION OF OBLIGATIONS INTO SHARES.
Convertible debentures or bonds represent a common form of financing particularly during periods when common stock prices are on the rise. The conversion feature gives the bondholders an opportunity to benefit from the increase in the market price of the common shares of the issuing company while still maintaining their creditor rather than shareholder status. Because of this potential gain, convertible bonds generally carry lower interest rates than bonds that are not convertible.
The number of common shares into which each bond can be converted is known as the conversion rate. The market value of this number of shares represents the share value of the bond. When the bond is originally issued, a conversion ratio is selected that sets the value of the shares well below the par value of the bond. However, in future periods, both the share price and the share value of the bond may increase without limits.
Conversion seat.
-X-
Convertible bonds to pay xxx
Capital in common shares xxx
Share premium xxx
P / R conversion of bonds payable into common shares.
When are convertible bond owners likely to trade their bonds for equity stocks?
The trade point is reached when the dividends that would be received from the equity stocks exceed the interest payments currently received from the bond investment. When equity stock dividends reach this level, bond owners can increase their income by converting cash and dividends; convertible bonds must be converted before their expiration date if the market price of the common stock exceeds the conversion price.
CONCLUSION.
Investments in stocks and bonds are initially recorded at cost, and gains or losses from changes in the market value of investments are recognized when the investments are sold. Interest income from a bond investment is recognized each month as it accumulates. Stock dividend income, however, does not accrue, it is recognized when received. Investments in short-term bonds generally appear on the balance sheet at cost; Short-term investments, on the other hand, are valued at the lowest market cost.
Treasury shares are not an asset. When own shares are purchased, the corporation is eliminating part of its shareholders' equity through a payment to one or more shareholders. The purchase of own shares should be considered as a reduction of the shareholder's equity and not as the acquisition of an asset. For this reason, the Treasury stock account should appear on the balance sheet as a deduction in the shareholders' equity section.
BIBLIOGRAPHY.
Website consulted.
http://www.monografias.com/trabajos11/item/item.shtml.
Texts consulted:
- CATACORA, Fernando. "Accounting. The basis for managerial decisions ”. Publisher: McGraw Hill. Caracas, Venezuela 1998. MEIGS AND MEIGS, Better Whittington. "Accounting. The basis for managerial decisions ”. Publisher: McGraw Hill. Colombia 1998. MORENO, Joaquin. "Intermediate Accounting 2". Mexican Institute of Public Accountants AC México, DF 1994.
INVESTMENTS
Contributed by: Mary Emily B
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