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Microsoft Money Investment Recordkeeping Tricks

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.

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.

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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

CPA Stephen L. Nelson is the author of Quicken for Dummies,

The Microsoft Money Guide to Personal Finance, 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