2. Characteristics of short term investment
Accounting for short term investments in
debt and equity securities
-Purchases, disposals and reclassification
-Application of lower of cost or market
(LCM)
2
3. To receive a return on idle cash
To develop or maintain relationship with
another company
To gain control of another company
3
4. 2 criteria must be met to qualify as a short
term investment:
Must be capable of reasonably prompt
liquidation
Must be management intent to convert
them to cash within one year (or
operating cycle)
4
6. Represent ownership in a company
The shareholders have the right to collect
dividends and vote on corporate matters
6
7. Financial instruments issued by a company that
have the following characteristics:
A maturity value, representing the amount to
be repaid to the debt holder at maturity
An interest rate, (either fixed or variable)
A maturity date, indicating when the debt
obligation will be redeemed
7
8. MES is recorded at cost when it is acquired
The cost includes brokerage fee, tax and other
charges incurred for purchasing
Example 1: 23 -2-2012
Zoom Bhd bought 10,000 ordinary shares of Xbeen
Industries at market price of RM51.50/share plus
broker commission of RM4,400
COST OF MES = PURCHASE PRICE + OTHER
PURCHASING COSTS
8
9. To record purchase
Dr Investment in Xbeen
Cr Cash
(10,000x RM51.50+RM4,4000
519,400
519,400
To record dividend declared, e.g.
RM1.50 per share
Dr Dividend receivable
Cr Dividend revenue
(RM1.50 x 10,000)
15,000
15,000
To record dividend paid
Dr Cash
Cr Dividend receivable
15,000
15,000
9
10. MES can be sold when cash is needed or when
there is profit arising from the share value
Disposal or selling of MES will incur brokerage
fees, tax and other fees
NET SALES = SALES’S PROCEED – COST OF SALES
NET SALES – COST OF MES =REALIZED PROFIT/LOSS
10
11. Example 2: On 23-9-2012, Sold 5,000 Xbeen
shares. The market price is RM58 per share.
Broker commission + tax = RM2,780
Sales (5,000 x 58) 290,000
(-) Commission + tax (2,780)
Net sales 287,220
Cost of shares (5,000 x 51.94*) (257,700)
Profit from sales 27,520
* RM519,400/10,000
11
12. Journal entry:
The gain/ loss will be reported in the Income
Statement under the heading of Other
income/Other expenses
DR Cash 287,220
CR Investment in XBeen 259,700
CR Gain on sale of share 27,520
12
13. Carrying amount of short term investment
should be recorded at:
a) Market value; or
b) The lower of cost and market value (LCM)
13
14. If market value is applied, the carrying amount
of the investment must be adjusted to market
value at each date of statement of financial
position.
14
15. Conditions: If short term investments are
carried at LCM value, the carrying value
should be determined either:
a) On an aggregate portfolio basis;
b) In total or by category of investment,
or
c) On an individual investments basis
15
16. If current investments are valued using LCM,
application of LCM must then be consistently
applied.
‘Investment Allowance’ account used to
capture valuation write-down (the difference
between aggregate cost and fair value of
current investment) in the Statement of
Financial Position.
‘Unrealized loss’ account used to report the
valuation write-downs in the Statement of
profit or loss and other comprehensive
income.
16
17. Given for Western Publishing Corp. on 31 Dec
2012
Apply LCM on an individual security basis
Investments Cost (RM) Fair Value
(RM)
Air Ana shares 43,860 51,500
CIBS shares 184, 230 175,200
Magna shares 86,360 91,500
Portfolio Total 314,450 318,200
17
18. Western Publishing Corp.
Securities Portfolio
31 December 2012
Investments Cost
(RM)
FV (RM) Unrealized
GainLoss
Air Ana shares 43,860 51,500 7,640
CIBC shares 184,230 175,200 (9.030)
Magna shares 86,360 91,500 5,140
Portfolio total 314,450 318,200 (9,030)
Note: Gain will not be recorded
18
19. To record the LCM rule, the journal entry at
31 December 2012 will be:
We will now apply the LCM valuation based
on the portfolio as a whole.
DR Unrealized loss 9,030
CR Investment in CIBC 9,030
19
20. Western Publishing Corp.
Security Portfolio
31 December 2012
Investments Cost (RM) FV (RM) Unrealized
GainLoss
Air Ana shares 43,860 51,500 7,640
CIBC shares 184,230 175,200 (9.030)
Magna shares 86,360 91,500 5,140
Portfolio total 314,450 318,200 3,750
Note: The total fair value is higher than the total historical
cost. No gain is recorded until it is realized (sold)
20
21. If total fair value < Total cost
TFV = RM310,000
TC = RM314,450 the difference will be
recognized as unrealized loss on MES.
Journal enty:
DR Unrealized loss on MES 4,450
CR Investment allowance 4,450
21
22. The loss will be recorded in the Statement of
profit or loss and other comprehensive
income under the heading of the other
comprehensive income.
Investment allowance will be shown in the
Statement of Fin. Position as below:
Current Asset
MES
(-) Investment
allowance
RM314,450
(4,450)
310,000
22
23. If the total fair value for the next period is
higher than the carrying amount,
Recoverable Unrealized loss will be
recognized.
The maximum recoverable amount should be
the balance of Investment allowance
account.
From the previous example the maximum
recoverable amount is RM4,450
23
24. E.g. for the next period, the total fair value
of portfolio is RM313,000
DR Investment allowance 3,000
CR Recoverable unrealized loss on MES
Statement of Financial Position (partial)
MES
(-) Investment allowance
RM314,450
(1,450)
313,000
3,000
24
26. 31/12/09 Bal b/f 30 2009 IS
(expense)
30
31/12/00 Bal b/f 40 1/1/2009 Bal.
IS
(expense)
30
10
2010
31/12/20
11
IS
(recover)
Bal B/f
20
20
1/1/2011 Bal. 40
2012
31/12/20
12
IS
(recover)
20
-
1/1/2012 Bal. 20
26
27. If management intent changes and does not
plan to hold the investment for temporary
purposes, the investment is to be reclassified
as a long term investment.
The amount at which investment is
transferred depends upon the accounting
basis for short term investment. If the lower
of cost or market was the accounting basis,
LCM would be the new cost.
The difference between the cost and market
value will be treated same as for sales of
short term MES, i.e. either realized profit or
loss will arise.
27
28. Current investments of X Bhd as at
31/12/2012 are as follows:
Investment allowance account balance
and unrealized loss in RM5,500.
On 31/12/2012 X Bhd reclassified
investment in Magna as long term
investment.
Investments Cost (RM) FV (cost)
CIBC shares 25,000 21,000
Magna shares 17,500 16,000
Portfolio Total 42,500 37,000
28
29. Journal entry:
If the unrealized loss and investment
allowance account had a balance or
RM5,500.
It should be reduced by RM1,500 (realized
loss from reclassification) of MES. This
will make the new balance of RM4,000.
DR MES in Magna (long term)
Loss on reclassification
CR MES in Magna
16,000
1,50
17,500
29
30. Previously MDS was recorded at cost. However,
MDS now can be recorded using LCM method.
The journal entries are same as for MES.
Purchases of MDS is recorded at cost. But when
purchased between interest payment dates, the
accrued interest is recorded at the date of
purchase (the company has to pay the MDS cost
plus accrued interest).
However, the extra charge (interest portion)
will not be included as part of MDS cost but will
be recorded as accrued interest.
30
31. On 1/4/2011 AAA Bhd bought bonds at the rate
of 86, 100 units of BBB Bhd’s bond with face
value of RM1,000, interest rate is 10%. Interest
is payable on 1 July and 1 January. Broker’s cost
and commission is RM1,720.
31
33. Discounts or premium on bond will not be
recorded separately for short term investment
1 July, interest earned journal entry:
When the MDS is disposed, the difference between
cost and selling price will be recorded as gain or
loss.
E.g. (use the previous example) On 1/11/2011,
AAA Bhd sold investment in BBB’s bond at the rate
of 98 with accrued interest. Related commission
and tax expense is RM1,870
DR Cash
CR Interest revenue
Accrued interest
5,000
2,500
2,500
33
34. Calculation:
Bond’s selling price (100x1000x0.98) 98,000
Less: Commission and tax (1,870)
Net proceed 96,130
Carrying amount of bond (cost) 87,720
Gain from disposal of bond 8,410
Gain from disposal will be illustrated in the income
statement under the item of other income
Journal entries:
DR Cash 96,130
CR MDS Bond 87,720
Gain on disposal 8,410
34
35. Journal entries:
DR Interest receivable 3,333
CR Interest revenue 3,333
Calculation:
100,000 x 10% x4/12 = 3,333
35
36. Temporary investment is classified as current
asset in the Statement of Financial Position.
Disclosure required are:
1) Accounting policies
I. The determination of carrying amount of
investment
II.The treatment of changes in market value
of current investments carried at market
value
III.The treatment of a revaluation surplus on
the sale of a revalued investments
36
37. 2) The significant amounts included in income
for:
I. Interest, royalties, dividends and rentals on
long term and current investments
II. Profit and losses on disposal of current
investments and changes in value of such
investments
3) The market value of marketable investments
if they are not carried at market value
4) The fair value of investment properties if
they are accounted for as long term
investments and not carried at fair value
37
38. 5)Significant restrictions on the realizability
of investments or the remittance of
income and proceeds of disposal
38
