This case study focuses on accounting for marketable securities, which are investments in stocks, bonds, and other securities that a company can easily sell on a public exchange. The purpose of this note is to provide an understanding of how to account for marketable securities and the various methods used to value them on a company’s balance sheet.
The main issue in this case is how to account for marketable securities on a company’s balance sheet. This includes determining the initial cost of the securities, determining their fair value, and recognizing any gains or losses on their sale.
The accounting treatment for marketable securities depends on whether they are classified as held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are those that a company intends to hold until maturity, while trading securities are those that a company intends to sell in the short term for profit. Available-for-sale securities are those that do not fall into either of the first two categories.
For held-to-maturity securities, the initial cost is recorded as the acquisition cost, and any premium or discount is amortized over the life of the security using the effective interest method. Gains and losses are not recognized on the sale of held-to-maturity securities.
For trading securities, the initial cost is recorded as the acquisition cost, and any changes in fair value are recognized in net income. Gains and losses on the sale of trading securities are recognized in net income as well.
For available-for-sale securities, the initial cost is recorded as the acquisition cost, and any changes in fair value are recognized in other comprehensive income. Gains and losses on the sale of available-for-sale securities are recognized in net income.
Accounting for marketable securities requires a thorough understanding of the various methods used to value them and the proper accounting treatment for each type of security. Companies must carefully evaluate the nature of their investments and their intended holding periods to determine the appropriate classification of their securities and the accounting treatment that should be applied.
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Companies should develop clear policies and procedures for accounting for marketable securities and ensure that their accounting staff receives appropriate training in this area. Additionally, companies should regularly review their investment portfolios to ensure that they are properly classified and that any gains or losses are appropriately recognized in their financial statements.
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