BackHeld-to-Maturity (HTM) Securities quiz #1
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BackWhat are held-to-maturity (HTM) securities, and how are they accounted for when purchased at a premium or discount?
Held-to-maturity (HTM) securities are debt investments, like bonds, that a company intends and is able to hold until maturity. When purchased at a premium (above face value), the premium is amortized over the bond's life, reducing interest revenue each period. When purchased at a discount (below face value), the discount is amortized over the bond's life, increasing interest revenue each period. The straight-line method is commonly used for amortization in educational settings. How does the difference between the stated interest rate and the market interest rate affect the purchase price of a bond classified as a held-to-maturity investment?
If the stated interest rate is higher than the market rate, the bond sells at a premium (above face value). If the stated rate is lower than the market rate, the bond sells at a discount (below face value). If the rates are equal, the bond sells at face value. How is the premium or discount on a held-to-maturity bond investment amortized, and what is the impact on interest revenue?
The premium or discount is amortized over the bond's life, typically using the straight-line method. Amortizing a premium decreases interest revenue each period, while amortizing a discount increases interest revenue each period. What journal entries are made for interest received and amortization of premium or discount on held-to-maturity securities?
For each interest period, the investor records cash received (based on the stated rate and face value), amortizes the premium (credit) or discount (debit), and recognizes interest revenue as the balancing figure. The entries adjust the carrying value of the investment toward face value by maturity. What determines whether a held-to-maturity (HTM) bond is purchased at a premium or a discount?
A bond is purchased at a premium if its stated interest rate is higher than the market rate, and at a discount if its stated rate is lower than the market rate. How is the purchase price of a held-to-maturity bond calculated when bought at a premium or discount?
The purchase price is calculated by multiplying the bond's face value by the issue percentage (e.g., 108% for a premium or 94% for a discount). What is the purpose of amortizing the premium or discount on a held-to-maturity bond?
Amortization adjusts the carrying value of the bond so that by maturity, only the principal (face value) remains on the books. How does amortizing a premium or discount affect interest revenue for held-to-maturity investments?
Amortizing a premium decreases interest revenue each period, while amortizing a discount increases interest revenue each period. What journal entries are made when receiving interest on a held-to-maturity bond purchased at a premium?
The entries include debiting cash for interest received, crediting premium on bonds for the amortized amount, and crediting interest revenue for the balancing figure. How is the straight-line method used to amortize a premium or discount on held-to-maturity bonds?
The total premium or discount is divided evenly over the number of interest periods, and this amount is amortized each period.
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