A company's balance sheet provides important information to investors.
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When you evaluate stocks to purchase, you might want to look at a company’s balance sheet and check the investments held. A held-to-maturity investment is a long-term security that has a maturity date -- in other words, debt. A company is not obligated to hold the debt security until maturity, but that must be its primary intent. The balance sheet must report held-to-maturity instruments separately from trading securities and available for sale securities.
The Balance Sheet
The balance sheet is organized according to the accounting equation: assets equal liabilities plus equity. Assets are physical, financial or intangible items that help to generate revenue. Current and noncurrent assets are reported separately. A company expects to use up current assets within one year. Current assets include cash, accounts receivable and inventory, while noncurrent assets include equipment, manufacturing plants, buildings and other long-lived items. They also include held-to-maturity investments as well as intangible items such as patents and goodwill.
Booking the Purchase
A company books the purchase of held-to-maturity securities as noncurrent assets on the
balance sheet. For example, if the company buys a $1,000 bond at par, it debits the held to maturity securities account and credits the cash account for $1,000. The company normally does not update the book value of the bond. However, certain adjustments might be necessary. The company will have to account for any discount or premium on the bond. It also might have to write down the book value if the bond’s value becomes permanently impaired.
Amortizing the Bond
A discount bond sells for less than its face value, while a premium bond costs more than face value. A company must amortize bond discounts and premiums. This process converts the discount into interest income and the premium into interest expense through annual installments until maturity. The discount is credited to a balance sheet contra-asset account called bond discounts, and this account is linked to the held-to-maturities account. Premiums reside as debit balances in another linked account -- bond premiums, which is an adjunct asset account. The balances in the premium and discount accounts are reduced each year by the amount of interest resulting from the amortization schedule.
Disposing of the Investment