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The definition of a debt is held-to-maturity is a debt which the company has both the ability and intent to hold until maturity. Debt held to maturity is classified as a long-term investment and it is recorded at the market value (original cost) on the date of acquisition. All changes in market value are ignored for debt held to maturity.
Debt held to maturity is shown on the balance sheet at the amortized acquisition cost. To find the amortized acquisition cost the securities are amortized like a mortgage or a bond.
Z company purchases 40,000 of the 8%, 5-year bonds of Tee Company for $43,412. The bonds provide a 6% return, with interested paid semiannually. Z Company has both the ability and intent to hold the securities until the maturity date.
The accounting records show the debt at the amortized cost (face amount plus premium/less discount) and the difference between the maturity value and the cost of the bonds is amortized to the income statement over the life of the bonds.
In order to record the interim interestrevenue and report the investment on the balance sheet, it is necessary to prepare an amortization schedule for the debt.
The first interest payment is $1,600, but since the company paid a premium, the effective interest earned is $1,302 (net the amortization of the premium).
The Journal Entry:
Cash debit ---------------------$1,600
Premium on bonds credit ----$298
Interest revenue credit ------- 1,302
The Z Company's investment in Tee company is shown on the balance sheet as follows: