Short term investments, also called marketable securities, are securities that (1) management intends to convert to cash

within one year or the operating cycle and (2) are readily convertible to cash. Short-term investments are current asset and include both debt and equity securities. Debt securities reflect a creditor relationship such as investments on Note, bonds and certificate of Deposit (CD). Equity securities reflect an ownership relationship such as shares of stock issued by companies. Accounting for short-term investments: Debt securities: Short-term investments in debt (and equity) securities are recorded at cost when purchased. For example, XYZ Company purchases short-term Note payable for $4,000 on January 10. XYZ Company entry is: Jan 10 Short-term investments Cash $4,000 4,000

These notes mature on May 10. When the cash proceeds of $4,000 plus the $120 interest (4,000*9%*120/360) are received at maturity. The company record is: May 10 Cash Short-term investment Interest revenue $4,120 4,000 120

Equity securities: The cost of short-term investment in equity securities include all necessary costs to acquire it, including commission paid. For example, XYZ Company purchases 100 shares of Nike common stock as a shortterm investment for $50 per share plus $100 in commission. The entry to record this is: June 2 Short-term investment Cash $5,100 5,100

The commission is recorded as part of the investment cost. XYZ also receives $0.40per share cash dividends on its Nike stock during the current period. This dividend is recorded in a revenue account as follows: Dec. 12 Cash Dividends revenue $40 40

Valuing and reporting short-term investments: Companies must value and report most short-term investments at their fair values. Fair value of a security is its market value. Accounting requirements vary depending on whether short-term investments are classified as (1) held-to-maturity, (2) Trading, or (3) available-for-sale securities. The financial presentation for each of this classification is as follow: Held-to-maturity Securities Are debt securities that the company has the intent and the ability to hold until they mature. Held-to maturity is reported in the current assets if their maturity dates are within one year or accounting cycle and they are reported at cost (plus accrued interest). Trading Securities Are debt and equity securities that the company intends to actively manage and trade for profit. This means that frequent purchases and sales are made to earn profit on short-term price changes. Trading securities are especially common with financial institutions such as banks and insurance companies. The entire portfolio of trading securities is reported at its market (fair) value with a market adjustment to the cost of the portfolio. The term portfolio is reported to a group of securities. Any unrealized gain or loss from a change in the market value of the portfolio of trading securities during a period dis reported on the income statement. For example, XYZ Companys portfolio of the trading securities has a total cost of $11,500 and a market value of $13,000on December 31, 2012 (this is the first year it held trading securities). The difference between the cost and the market value reflect $1,500 gain. This gain is an unrealized gain because it is not yet confirmed by actual sales of these securities. XYZ Company records this gain as: Dec. 31 Market adjustment-trading Unrealized gain-Income $1,500 1,500

The unrealized gain (or loss) is reported in the other revenues and gains (or Expenses and losses) section on the income statement. After posting this entry, XYZ company investment in trading securities is reported in the current assets section of its balance sheet as shown: Current asset: Short-term investment-trading (at cost).$ 11,500 Market adjustment- trading.1,500 Short-term investments- trading (at market) $13,000

The total cost of the portfolio of trading securities is maintained in one account and the market adjustment is recorded in a separate account. The market adjustment is revised at the end of each period to equal the difference between the cost and market values.

Selling trading securities When individual trading securities are sold, the difference between the net proceeds from the sale (sale price less fees) and the cost of the individual trading securities that are sold is recognized as a gain or a loss. For example, when XYZ Company sells its $5,100 short term investment in Nike stock on December 15 for net proceeds of $5,400, it recognizes a gain of $300. The entry to record this sale is: Dec. 15 Cash Gain on sale of short-term investments Short-term investments $5,400 300 5,100

This gain is reported in the Other revenues and Gains section on the income statement. If a loss is recorded, it is shown in Other Expenses and losses. When XYZ Company computes its market adjustment for trading securities at the end of the period, it excludes the cost and market values of the Nike stock since it has been sold. Available-For-Sale securities Are debt and equity securities not classified as trading or held-to-maturity securities? Available-for-sale securities are purchased to yield interest, dividends or increase in market value. They are not actively managed like trading securities. Similar