Chapter 8 - Investments in equity securities. This chapter describe what an equity investment is and the criteria used to determine whether investments in securities should be classified as current or noncurrent on the balance sheet. | 1 Chapter 8: Investments in Equity Securities 2 2 Equity Securities Classified as Current 3 Two criteria must be met for an investment in a security to be considered current and thus warrant inclusion as a current asset: The investment must be readily marketable. Management must intend to convert the investment into cash within the time period of current assets (one year or the operating cycle, whichever is longer) 3 Trading and Available-for-Sale Securities 4 Investments in readily marketable equity securities are classified into one of two categories: trading securities (current asset) or available-for-sale securities (current or long-term depending on management’s intention). 4 Trading and Available-for-Sale Securities 5 Purchasing Trading and Available-for-Sale Securities - Recorded on the balance sheet at cost, including acquisition costs Declaration and Receipt of Dividends – recorded as a receivable and revenue Sale of Securities – if proceeds exceed balance sheet value, a realized gain is recognized, otherwise – a realized loss 5 Price Changes of Securities on Hand at the End of the Accounting Period 6 Adjusting journal entries restate the balance sheet values of the securities to reflect their current market values. These adjustments give rise to unrealized gains and losses In the case of trading securities, these gains or losses are considered temporary accounts, appear on the income statement, and are reflected in retained earnings. 6 Cont’d 7 In the case of available-for-sale securities, the unrealized price changes are considered permanent accounts and are carried in the shareholders’ equity section of the balance sheet. 7 Reclassifications and Permanent Market Value Declines 8 Investments sometimes suffer a permanent market value decline. The price declines and is not expected to recover. The security should be written down to its market value, and a realized loss that reduces net income should be recognized immediately whether the security is . | 1 Chapter 8: Investments in Equity Securities 2 2 Equity Securities Classified as Current 3 Two criteria must be met for an investment in a security to be considered current and thus warrant inclusion as a current asset: The investment must be readily marketable. Management must intend to convert the investment into cash within the time period of current assets (one year or the operating cycle, whichever is longer) 3 Trading and Available-for-Sale Securities 4 Investments in readily marketable equity securities are classified into one of two categories: trading securities (current asset) or available-for-sale securities (current or long-term depending on management’s intention). 4 Trading and Available-for-Sale Securities 5 Purchasing Trading and Available-for-Sale Securities - Recorded on the balance sheet at cost, including acquisition costs Declaration and Receipt of Dividends – recorded as a receivable and revenue Sale of Securities – if proceeds exceed balance sheet value, a .
