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Concept Introduction:
Classification of Investments:
The investments are classified on the basis of the two factors to be considered
1. Intent of the company
2. Length of time for which it will be held.
The three categories for investments are
i. Trading investments (Short-term investment)
The debt and equity securities investments will be classified as trading securities if they are purchased with an intention to be sold in a short time of their purchase. Suppose, 3 months or 4 months i.e. held with an intention to be sold in a short period.
ii. Available-for-sale investments (Long term as well as short term investment)
The debt and equity securities investments will be classified as available-for-sale investments if they are purchased with an intention to be sold in a longer time period say, more than a year. By default all the investments are classified as available-for-sale investments.
iii. Held-to-Maturity (Long term investment)
Held-to-maturity investments are the investments that are purchased with an intention to be held till maturity. When a purchase is made with an intent that it will be held till maturity, it will be classified as held-to-maturity investment.
Thus, short term investments include the investments which can be easily liquidated into the cash and are held with an intention to be sold within a short-term period. All the held-to-maturity investments will be considered as long-term investments.
To classify:
Classification of statements as long-term investments.
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Chapter 15 Solutions
Fundamental Accounting Principles -Hardcover
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