TIP: An investment may be classified as a current asset (if it is a short-term or temporary investment) or as a noncurrent asset (if it is a long-term investment). For an investment to be classified as a current asset: (1) it should be readily marketable, and (2) there should be a lack of management intent to hold it for long-term purposes. Thus, investments are listed on the balance sheet either under the caption “Current assets” or “Investments.”
TIP: The cost of an investment includes its purchase price and all other costs necessary to acquire the investment. Thus, the cost of an investment in stocks or bonds is likely to include broker commissions and incidental fees.
TIP: When an investment is sold, broker commissions are deducted from the sales price to arrive at the net proceeds from sale. An excess of net proceeds over carrying value of the investment is recorded as a gain on sale of investment; an excess of carrying value over net proceeds is recorded as a loss on sale of investment. Gains and losses on the sale of investments are realized gains and losses.
TIP: Most of the terminology and computations involving bond investments are the same as those used by the issuer of bonds (which was a subject discussed in Chapter 10). A major difference is that a separate discount or premium account is normally not used by the investor; rather, a premium or discount on bond investment is netted against the face value of the investment and this net amount is ...