Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following best describes the accounting treatment when a company purchases $100{,}000 worth of equity securities as a long-term investment for permanent protection?

Do not record the investment until it is sold.

Record the investment as a current liability.

Record the investment at cost as a non-current asset on the balance sheet.

Expense the entire amount immediately on the income statement.

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Verified step by step guidance

Understand the nature of the transaction: The company is purchasing equity securities as a long-term investment for permanent protection. This indicates that the investment is intended to be held for an extended period and is not meant for short-term trading or immediate liquidation.

Review the accounting treatment for long-term investments: According to financial accounting principles, long-term investments in equity securities are typically classified as non-current assets on the balance sheet. They are recorded at cost, which is the amount paid to acquire the investment.

Clarify why the other options are incorrect: (1) Not recording the investment until it is sold violates the accrual basis of accounting, which requires transactions to be recorded when they occur. (2) Recording the investment as a current liability is incorrect because liabilities represent obligations, not assets. (3) Expensing the entire amount immediately on the income statement is inappropriate because the investment provides future economic benefits and should be capitalized.

Determine the correct accounting treatment: The investment should be recorded at its purchase cost ($100,000) as a non-current asset on the balance sheet. This reflects the company's intention to hold the investment for long-term purposes.

Ensure proper classification and disclosure: The investment should be categorized under 'Investments' or 'Other Non-Current Assets' on the balance sheet. Additional disclosures may be required in the notes to the financial statements, such as the nature of the investment and its valuation method.