Companies may want to use the surplus money they have to invest in buying stocks, bonds, or other things, and make a profit from them in the short term.
Accounting treatment of short-term investments in shares
First, restrictions on buying shares:
Companies invest their surplus money by buying shares and reselling them to make a profit, as the profit is equal to the difference between the cost of purchasing shares and its selling price in the market. Purchase of shares by registering the following:
First, restrictions on buying shares:
Companies invest their surplus money by buying shares and reselling them to make a profit, as the profit is equal to the difference between the cost of purchasing shares and its selling price in the market. Purchase of shares by registering the following:
Secondly, restrictions on selling shares:
If the company sells the shares or part of them, then this process will result in either a profit or a loss that will be recorded in the books. If the sale price is greater than the cost price, then this process will result in a profit that is recognized by the difference. If the sale price is less than the cost price, then this process will result A loss is recognized by the difference, as follows:
1 The selling price is less than the cost price (loss):
2 Selling price is greater than cost price (profit):
Third, restrictions when distributing investment profits in shares:
When the company issuing the share announces the distribution of profits, the company buying the shares records the profits it has achieved by recording the following entry:
When the company issuing the share announces the distribution of profits, the company buying the shares records the profits it has achieved by recording the following entry:
Fourth: Evaluation and inventory of short-term shares:
At the end of the fiscal year and when preparing the financial statements, the company makes an inventory of the remaining short-term shares, and there are two ways to evaluate and display the shares in the statement of financial position, namely:
At the end of the fiscal year and when preparing the financial statements, the company makes an inventory of the remaining short-term shares, and there are two ways to evaluate and display the shares in the statement of financial position, namely:
Offer shares at fair market value
Cost or market base, whichever is less
1 Offer shares at fair market value:
At the end of the financial period, the short-term shares are offered at the fair market value, whereby the total number of shares purchased at the cost price is compared with the total number of shares at the market price and the value is recorded with the difference.
Cost or market base, whichever is less
1 Offer shares at fair market value:
At the end of the financial period, the short-term shares are offered at the fair market value, whereby the total number of shares purchased at the cost price is compared with the total number of shares at the market price and the value is recorded with the difference.
But if the market price is less than the cost price, this means that there is a potential loss that is proven by registering the following entry: Potential stock profits appear in the income statement in the item of revenues and other gains, and short-term investments appear in the statement of financial position on the side of traded assets at fair market value.
For example, potential stock losses appear in the income statement in the item of expenses and other losses, and short-term investments appear in the statement of financial position on the side of the current assets at fair market value.
The securities portfolio of Al-Amal Company appeared as follows:
The cost statement is the market price
A company shares 1000 1250
B Corporation shares 500 750
C company stock 900 800
Total 2400 2800
Required:
Registration of settlement entries:
A company shares 1000 1250
B Corporation shares 500 750
C company stock 900 800
Total 2400 2800
Required:
Registration of settlement entries:
Solution method:
The total cost prices of the shares are compared with the total prices prevailing in the financial market and the value is recorded with the difference as follows:
2400-2800=400$ (potential profit) and the following entry is recorded:
The total cost prices of the shares are compared with the total prices prevailing in the financial market and the value is recorded with the difference as follows:
2400-2800=400$ (potential profit) and the following entry is recorded:
Debtor creditor statement
400
From h / short-term investments in stocks
400
From h / short-term investments in stocks
400 to h/potential dividend
Potential dividends
2 Valuation of shares at cost or market price, whichever is lower:
The second method for evaluating short-term shares is to evaluate them at cost or market price, whichever is lower. If the market price of the share is greater than its cost, the profit is not recognized, but the investments appear at the cost price as it is recorded in the books because it is the lowest value, but if the market value is less From the cost of the shares, then the difference is recognized as a loss and a provision for falling prices is formed, by recording the following entry:
Debtor creditor statement
xxx
From h / potential stock losses
xxx
From h / potential stock losses
xxx to h/ provision for falling stock prices
Potential stock losses
The potential losses account appears in the income statement in the item of expenses and other losses. As for the provision account, it appears in the statement of financial position on the side of current assets, deducted from the short-term investments account in shares, so that the account for short-term investments in shares appears in net terms, which represents the value of shares in the market, which is the value the least.
In the next fiscal period, if the market price is less than the cost price, then a new provision for falling securities prices is formed with the value of the difference between the market price and the cost price. The new provision is compared with the old provision and the value is recorded with the difference. If the old provision is greater than the new one, an entry is made to reduce The allowance balance is as follows:
Debtor creditor statement
xxx
From h/ the provision for the fall in the prices of securities
xxx
From h/ the provision for the fall in the prices of securities
xxx to h/potential dividends
Reducing the value of the provision
But if the old provision is less than the new one, then the provision is increased by recording the following entry:
Debtor creditor statement
xxx
From h / potential stock losses
xxx
From h / potential stock losses
xxx to h/ provision for falling stock prices
Increase the allowance balance
If the old allowance is equal to the new allowance, then no entry is made because there is a previous allowance registered in the books.
In the event that the market price of the shares is greater than the cost in the next financial period, then the old provision is canceled and the potential profits are recorded at the value of the provision, by writing the following entry:
Debtor creditor statement
xxx
From h/ the provision for the fall in the prices of securities
xxx
From h/ the provision for the fall in the prices of securities
xxx to h/potential dividends
Cancellation of the provision at the value of the realized potential profit
Example
The following balances appeared in the trial balance on 31/12/2015 as follows:
Debit balances Credit balances Account name
8000
Short term investments in stocks
8000
Short term investments in stocks
400 provision for falling stock prices
If you knew that the market price of the shares on 31/12/2015 was equal to $7,000
If you knew that the market price of the shares on 31/12/2015 was equal to $7,000
Required:
Registration of settlement restrictions for investing in shares
Show the method of displaying shares in the balance sheet
Solution method:
First, the market price of the share is compared to the cost price recorded in the books as follows:
8000-7000 = $1000 (possible loss) and it equals values
Registration of settlement restrictions for investing in shares
Show the method of displaying shares in the balance sheet
Solution method:
First, the market price of the share is compared to the cost price recorded in the books as follows:
8000-7000 = $1000 (possible loss) and it equals values
Add New Comment