EYK9_1 - E x t e n d Yo u r K n o w l e d g e 9 - 1 : A c c...

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Extend Your Knowledge 9-1: Accounting for Temporary Investments This section explains the basics of accounting for temporary investments in both debt and equity securities. In both cases, the investor records the investment at acquisition cost, which includes the purchase price plus any brokerage fees and commissions. The investor earns interest by investing in debt securities and earns dividend revenue by investing in shares. Debt Investments Temporary investments are recorded at cost when purchased. TechCom Company, for instance, purchased short-term notes payable of Transalta Corporation for $4,000 on January 10, 2005. TechCom’s entry to record this purchase is: These notes mature on May 10 and the cash proceeds are $4,000 plus $120 interest. When the proceeds are received, TechCom records this as: LO 1 Describe and explain the purpose of debt and share investments. 2005 Jan. 10 Temporary Investments. ................................... 4,000 Cash. .......................................................... 4,000 Bought $4,000 of Transalta notes due May 10. Learning Objectives LO 1 Describe and explain the purpose of debt and share investments. LO 2 Identify and account for temporary investments. May 10 Cash. ................................................................. 4,120 Temporary Investments . ............................ 4,000 Interest Revenue . ...................................... 120 Received cash proceeds from matured notes.
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Share Investments The cost of an investment includes all costs necessary to acquire it, including commissions paid. TechCom, for instance, purchased 300 Cameco Corporation common shares as a temporary investment. It paid $50 per share plus $375 in commissions. The entry to record this purchase is: Note that the commission is not recorded in a separate account. Why? The cost principle P. 4 1 states that all assets are recorded at their original cost and since the $375 commission is a necessary cost incurred to acquire the asset, it is recorded as part of the asset’s cost. On December 12, TechCom received a $0.40 cash dividend per share on its short-term Cameco share investment. This dividend is credited to a revenue account as follows: Balance Sheet Presentation The CICA Handbook requires that temporary investments be reported on the bal- ance sheet at the lower of cost or market (LCM) P. 360 . 1 To calculate the lower of cost or market, the total cost of all marketable securities held as temporary invest- ments (the portfolio) is compared with the total market value of the portfolio. Comparison on an item-by-item basis is normally not done. For example, assume that TechCom did not have any temporary investments
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