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Chapter 5-10

MGT220H5 Chapter Notes - Chapter 5-10: Canada Revenue Agency, Weighted Arithmetic Mean, Accrual

Course Code
Kathy Falk

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[Chapter 5: Short Term Investments and Receivables
Short term investments aka marketable securities/temporary investments: are investments that
a company plans to hold for one year or less
oThese investments allow the company to invest excess cash for a short period of time
and earn a return until the cash is needed
oNext most liquid asset after cash before receivables
oHeld for a few months at most
Held for trading investments: hold for a short period and then sell it for more than its cost
oCan be shares or bonds in another company
If price of share increasesgain and if decreasesloss
oJournal entry for purchase of investment
DR Short term investment
CR Cash
oJournal entry for receiving cash dividend
DR Cash
CR dividend revenue
Unrealized gains and losses:
oHeld for trading investments are reported on the balance sheet at fair value
oFair value: amount a willing buyer will pay to a willing seller to acquire the investment
oEx. Shares have risen by $2000 and fair value is $102000. There is an unrealized gain
It is an unrealized gain because they have not yet sold the investment
It is a gain because the fair value is greater than the investment cost. A gain has
the same effect on owners’ equity as revenue
The adjusting entry for this would be
DR Short term investments 2000
CR Unrealized gains on investment 2000
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102000 will be recorded on balance sheet and 2000 will be recorded on income
statement as an unrealized gain
If value decreased to 95000, then there would be an unrealized loss and the
adjusting entry for this would be
DR Unrealized loss on investment (5000)
CR Short term investments (5000)
Realized gains and losses: occurs only when an investor sells an investment
oRealized gainsale price greater than investment carrying amount
oRealized losssale price less than investment carrying amount
Ex. If the sale price is 98000 the journal entry would be
DR Cash (98000)
DRL Loss on Sale of investments (4000)
CR Short term investments (102000)
Notes to the Financial Statements: details about specific types of short term investments owned
at the end of the year should be disclosed
oIFRS companies can elect to report all gains and losses from short term investments
not held for trading as part of other comprehensive income instead of net income
oASPEprivate enterprise records these unrealized and realized gains and losses through
net income
Financial Statements:
oBalance sheet: short term investments are current assets, right after cash, reported at
fair value
oIncome statement: investments earn interest revenue and dividend revenue.
Investments also create gains and losses. For short term investments, these items are
reported on the income statement
Income Statement:
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Other Revenue, gains and (losses)
oInterest revenue
oDividend revenue
oUnrealized gain on investments
oNet income
Account for and Control receivables
oTypes of receivables:
Receivables: are monetary claims against others. They are acquired mainly by
selling goods and services on account (A/R) and by lending money (notes
A/R serves as a control account that summarizes the total amount receivable
from all customers
Companies also keep a subsidiary ledger of A/R with a separate account
for each customer
Notes receivables are more formal contracts than A/R. the borrower signs a
written promise to pay the creditor a definite sum at the maturity date. This is
why N/R are also called promissory notes
Collateral lender has permission to claim certain assets if borrower
fails to pay amount back
Other Receivables: miscellaneous category that includes loans to employees and
subsidiary companies. Some companies report other receivables under the
heading other assets on the balance sheet
Internal Controls over cash collections on account:
oBusinesses that sell on credit receive most of their cash receipts on from the collection
of A/R. Internal control over collections on account is important  separation of cash
handling and cash accounting duties
How do we manage the risk of not collecting:
oEstimate and account for uncollectible A/R:
Companies should account for what is not collected
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