Journal Entry for Held to Maturity Securities
Held-to-maturity security is a debt instrument that a company agrees to hold until the maturity date, at which point the issuer will be repaid the principal and interest. These types of securities offer investors protection against default and provide stability in times of market volatility. For these reasons, held-to-maturity securities are often seen as a safe investment option.
Held-to-maturity securities are typically issued by government agencies or large corporations with a strong credit rating. This means that there is little risk of default, making them a relatively safe investment. However, because they are not as liquid as other types of investments, held-to-maturity securities may not be suitable for all investors.
Investors should carefully consider their goals and risk tolerance before investing in held-to-maturity securities. These investments may not be suitable for everyone, but they can offer stability and peace of mind to those who are willing to hold them until maturity date.
As the company is highly likely to hold the security till the maturity date to receive the payment from the issuer, it is less likely to impact the change of instrument market value. It is not necessary to take into account the market movement as they are not willing to sell the security. The company is not required to record the value change and the unrealized gain/loss. The security value on balance sheet will remain the same from the purchase date until the maturity date.
Journal Entry for Held to Maturity Securities
When the company invests in the held to maturity security, they have to record it as the assets on the balance sheet. The company has to record it as the original purchase cost including other transaction costs.
Purchase cost is the cost that company spends to acquire the investment security.
Transaction cost is the cost that company spends when buying the security. It includes the commission, broker fee, and so on.
The company has to record both costs into the investment on balance sheet. The journal entry is debiting held-to-maturity security and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Held-to-Maturity Security | $$$ | |
| Cash | $$$ |
The journal entry will record the held-to-maturity security on the balance sheet. It also reduces the cash balance as the company makes payments.
The balance of held-to-maturity security will remain the same on the company financials statement. It will not change based on the market value. The gain and loss arising from the change of security will be recorded on the maturity date.
The issuer will payback based on the agreed amount, not the market value. However, the market value will move to the agreed amount. So it is highly likely to be the same.
On the maturity date, the company will receive the principal amount base on the agreed term. The journal entry is debiting cash and credit held-to-maturity security.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Held-to-Maturity Security | $$$ |
The transaction will remove the held-to-maturity security from the company balance sheet. The cash is already recorded when the issuer pays back the principal.
Interest Income
During the holding period, company has to record interest income based on the carrying amount and the effective interest rate. The effective interest will depend on the market rate rather than the issuer rate.
The journal entry is debiting interest receivable and credit interest income.
| Account | Debit | Credit |
|---|---|---|
| Interest Receivable | $$$ | |
| Interest Income | $$$ |
The transaction will increase the interest receivable and interest income.
The effective interest may be different or the same as the security interest rate.
Example
Company ABC has purchased the bonds for $ 100,000 from the issuer. The company will receive the interest 5% per year, the bond interest is the same as the market rate. The bonds will be matured in 4 years and ABC wish to hold the bond till the maturity date. Please prepare the journal entry for held-to-maturity security.
The company purchases the held-to-mature security, they have to record it on the balance sheet. The journal entry is debiting held-to-maturity security $ 100,000 and credit cash $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Held-to-Maturity Security | 100,000 | |
| Cash | 100,000 |
At the end of each year, company has to record the interest income bae on the effective interest and carry amount.
Interest income = $ 100,000 * 5% = $ 5,000.
As the issuer pays interest every year, ABC has to record cash received and interest income. The journal entry is debiting cash $ 5,000 and credit interest income $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Interest Income | 5,000 |
On the maturity date, the ABC will receive the principal back. The journal entry is debiting cash $ 100,000 and credit held-to-maturity security $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Held-to-Maturity Security | 100,000 |