MGT 220 Chapter 10

1
MGT 220 Chapter 10
2
Types of Investments
3
Temporary Investments - Classification

• Two criteria must be met to qualify as a
  temporary investment
• Must be capable of reasonably prompt liquidation
• Must be management intent to convert them to
  cash, within one year (or operating cycle)

4
Measurement

• Recorded at historical cost
• Cost includes purchase price and incidental
  direct costs
• Cost is more difficult to define when investments
  acquired for non-cash consideration
• Record at fair value of consideration given or
• Fair value of consideration received

5
Valuation of Temporary Investments

• Valued using LCM (Lower of Cost or Market)
• Applied to
• portfolio as a whole or
• individual item basis
• Application of LCM must then be consistently
  applied
• Investment Allowance account used to capture
  valuation write-downs
• Reported net balance cannot be above cost
  unrealized gains are recognized only to bring
  value back up to cost.

6
Application of LCM
Given for Western Publishing Corp. on December
31, 2002
Apply LCM on an Individual Security Basis.
7
Application of LCM Individual Security Basis
Note Gains will not be recorded.
8
Application of LCM Individual Security Basis
To record the the LCM rule, the journal entry at
December 31, 2002 will be
Loss on Investment 9,030 Investment
Allowance 9,030
9
Application of LCM portfolio basis
10
Temporary Investments Final Notes

• 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

11
Temporary Investments Bonds

• Bonds are carried at the present value of the
  future cash flows
• PV of the face value, plus
• PV of the interest annuity
• When purchased between interest payment dates,
  the accrued interest is recorded at the date of
  purchase

12
Presentation and Disclosure

• CICA Handbook, Section 3010 Disclose
• Valuation basis
• Market and carrying value