Lessons on Accounting Theory
As I wrap up my Fall semester in the Masters of Accounting program at KU, I decided to help a few budding accountants learn about Accounting Theory. Today’s topic is investments.
Investments
Investments include debt investments and equity investments. The three types of debt investments are available-for-sale, trading, and held-to-maturity. Whether the investment can reach its full maturity value and if the investor intends to hold it until it reaches maturity determines what classification the investment is under.
Available-for-sale and trading debt investments are recorded at fair value. However, trading securities recognized unrealized holding gains and losses in net income, while Available-for-sale securities recognize unrealized holding gains and losses as other comprehensive income and as a separate component of stockholder’s equity.
Held-to-maturity investments are recorded at amortized cost, not fair value. Unrealized Holding Gains or Losses are not recognized.
Held-to-Maturity Example
Hon company purchased 12% Held-to-Maturity bonds with a maturity value of $300,000.00 for $322,744.44. The bonds provide the bondholders with a 10% yield. The start date is January 1st, 2020 and the maturity date is January 1st, 2025. Use the effective interest method to allocate unamortized discount/premium.
What is the Journal Entry for the bond purchase?
Prepare a bond amortization schedule.
Prepare a Journal Entry to record interest revenue and amortization on December 31st, 2020.
Prepare a Journal Entry for interest revenue and amortization on December 31st, 2021
Available-for-Sale Example
Suppose that the Nick Corp. made an investment of $10,000,000 in 5% fixed-rate corporate bonds. These Available-for-Sale bonds were purchased at par. At year end, the market rates decline and the fair value of the bonds is $10,600,000. Interest is paid at the beginning of the year.
Record transactions related to the bonds in 2020 without electing to use the fair value method.
Record these transactions by electing to use the Fair Value Method.
