Accounting processes demand that companies categorize any investments or funds in equity securities or liability when they are acquired. These investments bought particularly equity securities can be put into custody until they mature, held also for buying and selling, or accessible for the transaction. Held to Maturity is the ability to hold an investment until maturity. There are certain types of investments that have a fixed maturity date, the best example of this is bonds (Spiceland, Sepe, Nelson, & Tomassini, 2007). Investment in bonds is an example of the type of investment that has a fixed maturity date and such kinds of investment options are accounted for using the amortized costing methods.
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There are various merits associated withheld to maturity accounting. Foremost the held to maturity accounting removes the burden of complex pricing that mostly affects bonds. It has been noted that for some time there has been trouble with the accounting of investments in marketable securities. The major challenge has been the timing recognition of the decline in the fair value of such values in the income at the end of a given period. Another advantage withheld to maturity accounting is that the Market value does not affect an investor who holds his investment to maturity. Such attributes ensure that investors are protected from fragile markets and the fluctuations that may arise from external influences.
When looking at bonds from the investor’s point of view, each bond is usually linked to a face value that matches up to the amount that the principals will receive during the maturity of the bond. Another fact is that every bond has an interest rate it attracts and this is stated as a contract. Bonds too have affixed term, which varies with the time for maturity.
When doing the calculation, it is accounted for at amortized cost not fair value. This is calculated by taking the discounted value of future cash flows using the internal rate of return as the discounted value. The internal rate of return is determined on the purchase of the security (Spiceland et al, 2010). This is then adjusted by multiplying the discounted value at each time t, by the ratio of the inflated par value at that time to the initial par value. This i.e.’ Initial par value’ is the initial purchase price.
When examining how the “books handle such business deal, at time of purchase debit an investment in bonds accounts with buying price plus brokerage fees and other accompanying acquirement costs and credit the bank”( Spiceland et al, 2010, p. 20). When recording interest earned semi-annually, debit the bank and credit the Interest income. When recording the redemption of bond investment at maturity, debit the bank account and credit the investment in Bonds accounts.
The sale of held-to-maturity investments before maturing generally violates the reason for their classification but alternatively circumstances are not inconsistent with the classification.When it occurs the company must record any gain or loss from the transaction. As a result, the company must also eliminate the investment account and collects any interest earned since the last interest date from the purchaser. The company must amortize any premium or discount before calculating the gains or loss on sale; this is from the last interest date to the sale date. This is necessary for determining the carrying value of investment on the date of the sale.
In the balance sheet, held to Maturity investments are classified as current or noncurrent based on the maturity date of individual securities.
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Spiceland, F., Sepe, J., Nelson, M. & Tomassini, L. (2007). Intermediate accounting. 5th Ed. New York, NY: St. Martin’s Press.
Spiceland, F., Stanko, M., Miller, W., Dagostino, T. & Jefferis A. (2010). Intermediate accounting II: Pharmacology Engineering Physics II Lab Manual. New York, NY: St. Martin’s Press.