Accounting for Debt Investments

Companies need to properly classify debt securities.

Companies can invest in debt securities. These debt securities involve the company lending money to another person or company and then earning interest on the debt. The borrower must pay back the amount borrowed in addition to the interest.

Types

A debt security can either be a trading security, a held-to-maturity security or an available-for-sale security.

Trading Security

A trading security is a security the company plans to sell in the near future. Report trading securities at their fair value each period.

Held-to-Maturity Security

Held-to-maturity securities are securities that the company will keep until the debt matures. Report held-to-maturity securities at their cost, then amortize the amount over their maturity life.

Available-for-Sale Securities

An available-for-sale security is any debt security that does not fall into the other two categories. Report these at their fair market value at the end of each period.

Unrealized Gains or Losses

If there is an unrealized gain or loss on a trading security, report the amount on the income statement. If there is an unrealized gain or loss on an available-for-sale security, report the amount in other comprehensive income. If there is an unrealized gain or loss on a held-to-maturity security, there is no reporting of income.

References

• Principles of Accounting: Chapter 9