Fegan Corporation has purchased two securities for its portfolio. The first is a

Question

Fegan Corporation has purchased two securities for its portfolio. The first is a stock investment in Plummer Corporation, one of its suppliers. Fegan purchased 10% of Plummer with the intention of holding it for a number of years, but has no intention of purchasing more shares. The second investment was a purchase of debt securities. Fegan purchased the debt securities because its analysts believe that changes in market interest rates will cause these securities to increase in value in a short period of time. Fegan intends to sell the securities as soon as they have increased in value.

Instructionsa
Write a memo to Sam Nichols, the chief financial officer, explaining how to account for each of these investments. Explain what the implications for reported income are from this accounting treatment.

Explanation / Answer

1. Investment in Plummer is a long term investment without controlling interest. It is a non current asset and is not used in the day to day running of business or to generate revenue for business. It should be recorded at the cost of purchase. In the balance sheet, it will be reported at cost or market value whichever is lower. If the market value of the shares is less than the cost,

2. The second purchase is a short term asset and will be reported as marketable securities at market value. If the market value is higher than the cost, the differnce is reported as gains on the profit and loss (statement of income) and a loss will be reported if the market value is lower than the cost

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