Evergreen Co. is planning to invest some of its excess cash in 5-year bonds issued by Continental Co. and in 2% of ordinary shares of Tang Co. Both Continental’s bonds and Tang’s shares are traded actively on securities market. Evergreen Co. plans to hold the bonds until the maturity date and trade the shares in short term. Regarding the accounting for these investments, answer the following questions:
1. How should Evergreen classify the bonds and the shares?
2. What is the accounting treatment for the Continental bonds? And what is the accounting treatment for the bonds if Evergreen has the following strategies?
1) an active trading strategy for the bonds or
2) a plan to sell the bonds in the long run.
3. Related to part 2, if Evergreen should change to a different accounting treatment for Continental bonds under an active trading strategy assumption, discuss the rationale behind the change.
4. What is the accounting treatment for the Tang’s shares?
5. Discuss the difference(s) between accountings for trading and non-trading equity investments.
Ans.1. Evergreen Should Classify Bonds as - Long Term Investment (As Holding period for Bonds is 5 Years)
Shares - Should Classify under Current Assets as Short Term Investment (As shares invested for short term only)
Ans. 2.1
Accounting treatment for the Continental bonds with an active trading strategy :
Should Classify under short term investment.
It will be always reported as the current market value (Fair Value) of the bond. Change in market value will be reported in each period income statement under unrealized gain/loss.
Ans. 2.2
Accounting treatment for the Continental bonds with a plan to sell the bonds in the long run :
It should be classified under long term investment.
It will be always recorded on the Face Value of the bond. If Evergreen purchases the $100 Bond at Value of $98 then the profit of $2 will be amortized for the next 05 years of the bond. As compared to the trading strategy where always recorded in Fair Value but for investment strategy always recorded in amortized value.
Ans.3
Here theses accounting treatment helps to identify Firms intent with investment. Also helps to judge on quick liquidity of firm also.
Evergreen Co. is planning to invest some of its excess cash in 5-year bonds issued by...
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