Question

Please do this assignment, by typing in one file of Ms Word
1.       Describe why companies invest cash in current operation, temporary investment and long term investment
2.       Summarize how the accounting for debt instrument is (by developing a chart /diagram/scheme)
3.       Summarize how the accounting for equity investment is (by developing a chart /diagram/scheme)
4.       How to value and report the investment?
5.       What is fair value accounting and how is the effect on the financial statement

thank you

Answer 1

1. Companies may have excess cash which may not be necessary for its current requirements, however may be necessary in the near future. Hence companies are not able to make investment for medium term or keep them as hard cash and waste the resources. Hence in order to manage these efficiently companies invest them in temporary investments that yields interest equivalent to the treasury bill index.

2.

Accounting of Debt Instruments

Debt Instrument a/c Dr	xxx
To Cash a/c		xxx
(debt instrument purchased)
Cash a/c Dr	xxx
To Interest Income a/c		xxx
(Interest received on the instrument)
Cash a/c Dr	xxx
Loss on sale of debt instrument (if any)	xxx
To Debt Instrument a/c		xxx
To Gains on sale of debt instrument (if any)		xxx
(sale of debt instrument)

3.

Equity Instrument

Equity Instrument a/c Dr	xxx
To Cash a/c		xxx
(equity instrument purchased)
Cash a/c Dr	xxx
To Dividend Income a/c		xxx
(Dividend received on the instrument)
Cash a/c Dr	xxx
Loss on sale of equity instrument (if any)	xxx
To equity Instrument a/c		xxx
To Gains on sale of Equity instrument (if any)		xxx
(sale of Equity instrument)

4. Debt instruments are reported as 'Trading securities' where the debt instruments are reported at CMP as on date of the balance sheet. The difference is recorded as unrealisaed gains/losses in the income statement. They may be also reported as 'Available for sale' where in the securities are reported at CMP, however the unrealised gains/losses will be transferred to a special account under the Other Comprehensive Income.

Equity instruments may be measured at fair value at end year as above or even as amortization basis.

5. Affect on Balance sheet: When assets and liabilities are recorded at fair value, the difference needs to be recorded. This may be done using the valuation allowance method. The unrealised gains or losses are recorded under equity.

Affect on Income statement: Instead of recording the difference under stockholders' equity, they can also be reported in the income statement or also reported after profits as Other Comprehensive Income.