Question

Cascade Co. is planning to invest some of its excess cash in 5-year bonds issued by Joyce Co. and in the 2% of ordinary shares of Teton Co. Both Joyce’s bonds and Teton’s shares are traded actively on securities market. Cascade Co. plans to hold the bond for long term and the shares for speculation. Regarding the accounting for these investments, answer the following

questions: 1. What is a financial asset? 2. Physical assets holder generate cash by using or selling the assets. For example, a property holder can enjoy rental income, and an inventory holder can sell it for revenue. How is a physical asset different from a financial asset? 3. What is the accounting treatment for a bond holder in general? 4. What is the accounting treatment for an equity holder in general? 5. After investing, the market value of the bond and shares fluctuate, how should Cascade account for it?

Answer 1

1 . Financial asset is a non physical asset which derives or gets its value from an underlying contract. Like bonds, stocks etc.

2. Physical assets have certain inherent value on the basis of certain substance like metal, real estate etc, whereas financial assets derive their value from a contractual claim over certain asset.

Further physical assets loose their value or get depreciated with the usage or passage of time whereas same is not the case with financial assets.

3 . Bonds in the books of the investors are shown on the asset side of the balance sheet and are continued to be shown at cost only.

4 Whereas if an investor has invested in equity shares, though, it is showing .on the asset side of the balance sheet however, it is shown at the value of cost or fair market value whichever is lower.

5 . If after investment market value of bond fluctuates and bonds are current investment then it should be recorded at cost or fair market value whichever is lower however if investment in bond is long term investment then it should be continued to be shown at cost only unless there is any permanent decline in the value of an asset.

On the other hand in case of investment in equity shared it should be shown at cost or fair market value whichever is lower whether it is a current investment or non current investment.