Microsoft Money provides powerful investment record-keeping
tools for individual investors. Unfortunately, once you step
beyond investments like stocks, bonds, and mutual funds, the
mechanics can get a little tricky. Here are some tips for
handling common investments in Money.
Certificate of deposits
If you purchase a certificate of deposit, you can treat it in
the same way that you treat a bond purchase. Basically,
certificates of deposits, or CDs, are just bonds issued by banks
or financial institutions often for a shorter period of time.
For example, you can think of a two-year CD as equivalent to a
two-year bond.
Zero coupon bonds
If you invest in bonds, you may know that some bonds don’t
actually pay periodic interest. Instead, these bonds, called
zero coupon bonds, pay their interest when the bond matures. For
zero coupon bonds, you need to annually accrue the interest on
the bonds. The annual interest needs to be accrued because, by
convention, you report the annual increase in the zero coupon
bond’s value as interest earned.
To record accrued interest on a zero coupon bond, record bond
interest that accrues in the normal way. In other words,
whatever amount shows as being accrued—this should appear on the
statement from your broker—record it as bond interest income.
After you record the bond interest that’s accrued, you need to
record a return of capital transaction that adds this accrued
interest back to the value of the bond. The amount of this
capital transaction, obviously, needs to equal the accrued
interest amount. But there is a twist here: You need to specify
the return of capital amount as a negative value. For example,
if you accrue $100 of interest on a zero coupon bond, you also
need to record a return of capital transaction for the bond
equal to –$100.
By recording the return of capital transaction, you in effect
transfer the bond interest money from the associated cash
account and add it back to the zero coupon bond’s value. In this
way the associated cash account shows the correct cash balance
and the zero-coupon bond shows the correct cost basis. The zero
coupon bond’s cash basis equals the original purchase price plus
all the accrued interest that’s been recorded to date.
Derivatives
Derivatives are securities that derive their value from some
underlying security. For example, an option to sell a stock,
called a put, is a derivative. It derives its value from the
underlying security. Another derivative is an option to buy a
stock, called a call. You can use Money to keep records of
derivatives, such as puts and calls you buy. In general,
derivative record-keeping is quite straightforward. If you buy a
derivative, say a put or a call, and later sell the derivative,
you simply have a normal investment transaction. You treat the
purchase and later the sale in the same way that you treat the
purchase and sale of any stock. If you make money, you realize a
gain. If you lose money, you realize a loss.
If you buy or sell a put or call and hold the option until it
expires, things work almost the same way. However, in this
special case, you do need to record a Final Sale transaction,
and the sales price is zero. Obviously, if you hold a put or
call until it expires, you don’t actually sell the derivative.
But you need to record a sale transaction to reflect the fact
that the option is no longer worth anything.
These are the basic techniques you need to know for put and
call record keeping—and record keeping for similar
derivatives—but there are two special circumstances in which
more complicated record keeping is required.
Selling Puts and Calls
If you sell puts and calls—note that the earlier discussion
involves you in investing puts and calls—you need to record the
option as a regular buy or sell transaction. In other words, if
you sell a put and the person to whom you sell it exercises the
put, you record this transaction as a regular sales transaction.
Similarly, if you sell a call, you record the transaction as a
regular buy transaction.
NOTE If you sell a put or call option and the option never gets
exercised, you record the amount of money the buyer pays you as
Other Income.
Exercising Puts and Calls
Typically, individual investors don’t actually exercise puts
and calls that they buy. Instead, they simply sell the option
back to the broker. However, you might end up exercising a put
or call, and in this case, you need to perform special record
keeping.
To record the exercise of a put option, record the sale of the
put option at a price equal to zero. This zero-value sale is how
you record the expiration of the option. After you have recorded
the expiration of the option, you record the sale of the stock
in the same way that you record the sale of any stock. (Remember
that a put is an option to sell stock.)
To record the exercise of a call option, record the sale of the
call option at a price equal to zero. This zero-value price lets
you record the expiration of the option. After you have recorded
the expiration, you record a regular buy transaction. (Remember
that a call option is an option to buy a security.)
Precious metals and commodities
You can treat investments in gold and other precious metals,
gold coins, agricultural items, and other commodities in the
same way that you treat shares of stock. Rather than entering a
share price, you enter a price per ounce or a price per bushel.
And rather than recording a specific number of shares, you enter
a specific number of whatever unit of measure is used to
describe the commodity. In the case of gold, for example, you
might enter the number of ounces. In the case of an agricultural
item, you might enter the number of bushels.
You can treat options to buy or sell commodities in the same
way that you treat options to buy or sell securities. The
earlier discussion on handling call and put options discusses
the techniques you use for this record keeping.
About the Author: Seattle tax CPA & author Stephen L. Nelson
wrote Quicken for Dummies and more than 100 other books as well.
Nelson holds an MBA in Finance and an MS in taxation. His web
site is http://www.stephenlnelson.com
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