Accounting for Debt Securities

A debt security is an investment in bonds issued by the government or a corporation. At the time of purchasing a bond, the acquisition costs are recorded in an asset account, such as “Debt Investments.” Acquisition costs include the market price paid for the bond and any investment fees or broker's commissions. For example, if Computers Galore purchases five of the 10%, ten-year $1,000 bonds issued by VEI on July 1 for $5,500 and pays broker's fees of $50, the entry to record the purchases would include both the purchase price and broker's fees in the cost of the investment.

The bonds pay interest every December 31 and June 30. When the semiannual interest is received on December 31, the entry to record it increases (debits) cash and increases (credits) interest revenue for $250 ($5,000 × 10% ×⁶/₁₂).

The bonds may be held to maturity or sold. If they are held to maturity, the bonds are classified as a long-term investment 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. If the bonds are held for sale (not held for maturity), their value changes as the market changes. At the time of the sale, a gain or loss is recorded for the difference between the book value and the proceeds received from the sale. For example, if one of the bonds was sold for $1,050 on June 1, the entry would include a loss of $60, the difference between the cost of $1,110 ($5,550 total acquisition cost divided by 5 bonds acquired) and the proceeds of $1,050.

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