Question

prepare the text of a brief email to the controller of the company you work for. your employer just won a major lawsuit and has received $50000000 in cash. the controller and CFO are planning to invest it in interest bearing debt securities ( corporate bonds).

prepare the text of an email explaining the accounting for these planned investments. then, make a recommendation on how these debt securities should be categorized _trading, available for sale, or help to maturity. assume all $50m will be invested in one of those categories, but only one. why do you make that particular recommendation?

Answer 1

Text of the e-mail:

This is with reference to the recent winning of $50 million in cash that the company received from the favorable decision in a major lawsuit. You and the CFO had mentioned your preference to invest this money in interest bearing debt securities i.e. in corporate bonds in particular.

In terms of accounting the purchase of corporate bond will be recorded by debiting “investment in bonds” and crediting “cash”. Bonds usually pay semi-annual interest/coupons and to record payment of coupons we will debit “cash” and credit “interest revenue”. Cases where we pay lower price for the bonds than the bond face amount can be accounted for by debiting “investment in bonds” and crediting “interest revenue”. This entry will be made for the total period of = duration of the bonds*2 (as the coupons will be paid semi-annually). When the bond matures then the entry will be to debit “cash” and credit “investment in bonds”.

(In case where we pay higher price for the bonds than the bond face amount, the entries would be the same except we would debit “Interest Revenue” and credit “Investment in Bonds” with each interest payment.)

I would recommend that we invest in the held to maturity category. This is because they will have a predetermined return and hence the investment as such will be predictable. Market fluctuations will have negligible impact on the value of held to maturity securities. Secondly investments in held to maturity are relatively safer and will allow us to make long term financial plans for our organization.