Professor Adams' Lecture Materials

LO4-01: Describe the key characteristics of a debt investment and demonstrate how to account for a purchase and for interest revenue.

Accounting for debt investments

Debt investment occurs when one company lends another company money through bonds and notes payable. The lending company is a debt investor in the borrowing company.

Example of debt investment

Recording the purchase of debt investment

Recording interest revenue

three classifications of debt investments

Debt investments are classified as being either (1) held-to-maturity (HTM), (2) trading securities (TS), or (3) available-for-sale securities (AFS) based on the nature of the investment (i.e., what was investor's purpose in lending the money?).

Regardless of a debt investment's classification, the way we record the purchase of the debt investment and the way we record interest revenue is exactly the same.

The classification of the debt investment (into one of the three categories above), however, will change how we account for unrealized holding gains and losses as well as the value of the investment in the balance sheet.

Unrealized gains and losses example: Apple bonds

Why treat unrealized holding gains and losses differently depending on the type of investment?

The purpose of financial reporting is to provide information that is useful to financial statement users (e.g., investors and lenders). So what is deemed "useful information" in this situation depends on what the debt investor intends to do with the investment.