ch13b - Accounting for Held-to-Maturity Investments...

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Unformatted text preview: Accounting for Held-to-Maturity Investments Held-to-maturity securities are debt investments such as notes or bonds that a com- pany intends to hold until their maturity date. This appendix describes and illustrates the accounting for bonds purchased as a held-to-maturity investment when the price of the bond differs from par value. Purchase of Bonds Bonds may be purchased directly from the issuing corporation or through a bond ex- change such as the NewYork Bond Exchange. Daily bond quotations are available from bond exchanges that include the following: 1. Interest rate 2. Maturity date 5 Statement of Financial Accounting Standards No. 159. "The Fair Value Option for Financial Assets and Financial Liabilities" (Norwalk. CT: Financial Accounting Standards Board. 2007). 586 Chapter 13 Investments and Fair Value Accounting 3. Volume of sales 4. High, low, and closing prices for the day Prices for bonds are quoted as a percentage of the face amount. Thus, the price of a $1,000 bond quoted at 99.5 would be $995, while the price of a $1,000 bond quoted at 104.25 would be $1,042.50. The cost of a bond investment includes all costs related to the purchase including any brokerage commissions. When bonds are purchased between interest dates, the buyer normally pays the seller the interest accrued from the last interest payment date to the date of purchase. The accounting for the purchase of a bond, which included ac- crued interest, was illustrated in this chapter. Bonds may be purchased at a price other than their face amount. Bonds are pur- chased at a premium or discount as follows: 1. If the coupon bond rate of interest is more than the market rate of interest for equivalent investments, bonds are purchased at a premium. That is, the bonds are purchased for more than their face amount. 2. If the coupon bond rate of interest is less than the market rate of interest for equiv- alent investments, bonds are purchased at a discount. That is, the bonds are pur- chased for less than their face amount. The cost of a bond investment is recorded in an investment account, Investment— Bonds. The face amount of the bond and related premium or discount are normally not recorded in separate accounts. This is different from the accounting for bonds payable for which separate premium and discount accounts are used. However, like bonds payable, any premium or discount on a bond investment is amortized over the remaining life of the bonds. Amortization of Premium or Discount Any premium or discount on a bond investment should be amortized over the re- maining life of the bond. The amortization affects the investment and interest revenue accounts as follows: 1. Bond Premium Amortization: Decreases Investment—Bonds and decreases Interest Revenue as shown in the following journal entry: Interest Revenue Investment—Bonds To amortize premium on bond investment. 2. Bond Discount Amortization: Increases Investment—Bonds and increases Interest Revenue as shown in the following journal entry: Investment—Bonds Interest Revenue To amortize discount on bond investment. The amortization on bond investments is usually recorded at the end of the period as an adjusting entry. The amortization can be computed using the straight-line or in- terest methods. Chapter 13 Investments and Fair Value Accounting 587 To illustrate, assume that on April 1, 2010, Crenshaw Inc. purchases 10—year, 8% bonds on their issuance date directly from XPS Corporation as a held-to—maturity investment. The bonds pay semiannual interest and were purchased at a discount as follows: Face amount of bonds $50,000 Less discount on bonds (6,000) Purchase price of bonds $44,000 The entries related to the bond investment during 2010 are as follows: Purchase of bonds on April 1, 2010. Investment—XPS Corporation Bonds Cash Purchase of bonds as held- to—maturity investment. Receipt of semiannual interest on October 1. Cash Interest Revenue Receipt of semiannual interest ($50,000 X 8% X 1/5). Adjusting entry for 3 months of accrued interest on December 31. Interest Receivable Interest Revenue Accrued interest ($50,000 X 8% X 1A). Adjusting entry for amortization of discount on December 31 using the straight-line method. Investment—XPS Corporation Bonds Interest Revenue Amortization of discount on bond investment ($6,000/120 months) = $50 per month $50 X 9 months = $450. Receipt of Maturity Value of Bond At the maturity date of the bonds, any premium or discount will be fully amortized, and the book value (carrying value) of the bond investment account will equal the face amount of the bonds. At the maturity date, the investor will receive the face amount of the bonds. To illustrate, the XPS Corporation bonds mature on April 1, 2020. At that date, the $6,000 discount will have been totally amortized, and Investment—XPS Corporation 588 Chapter 13 Investments and Fair Value Accounting Bonds will have a balance of $50,000. The receipt of the face amount of the bonds on April 1, 2020, is recorded as follows: Cash Investment—XPS Corporation Bonds Receipt of maturity value of bond investment. ...
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