Journal entry for debt investments

Introduction

In business, we may purchase some investments such as debt investments in order to earn extra revenue when we have excess cash that is not required for immediate use in the business operation. In this case, we can make the journal entry for debt investment in order to record the increase of our investment assets on the balance sheet as well as to account for the cash outflow from the business.

Debt investment is considered one of the low-risk investments that can provide us with investment income through periodic interest or coupon payments. Likewise, we can record the interest or coupon payment that we receive from the debt investment as extra revenue to the income statement.

Additionally, we can sell back the debt investments such as bonds back to the capital market before their maturity when we are in need of cash or when the issuer tries to redeem the debt instrument back. In this case, there is usually a gain or loss on the sale of the debt investments.

Journal entry for debt investments

Purchase of debt investments

We can make the journal entry to record the purchase of the debt investments by debiting the debt investments account and crediting the cash account for the cash outflow from the business.

This journal entry will increase the investment assets on the balance sheet by the total cost (including brokerage fee) of debt investments purchased. And as the debt investments follow the cost method under the accounting rule, this cost of debt investments will stay the same on the balance sheet until we sell or dispose of them.

Income from debt investments

Later, when we receive the investment income from the debt investment we purchased through the interest or coupon payment, we can make the journal entry to record the interest from debt investments by debiting the cash account and crediting the interest income account.

In this journal entry, the interest income is an investment income from the debt investment that we purchased to earn extra revenues besides our main business revenue. Likewise, this journal entry of income received from debt investments will increase both total assets on the balance sheet and total revenues on the income statement.

Example

For example, on January 1, we purchase $100,000 bonds which is a type of debt investments using the excess cash that we have on hand. These bonds have a maturity of five years with a 6% annual coupon payment which is payable on December 31 every year during the bond periods.

In this case, on January 1, we can make the journal entry to record the purchase of $100,000 debt investments by debiting the $100,000 to the debt investments account and crediting the cash account with the same amount.

January 1:

This journal entry will increase our long-term investment assets while decreasing the total current assets on the balance sheet by the same amount of $100,000 as of January 1.

Later, on December 31, when we receive the $6,000 ($100,000 x 6%) coupon payment, we can recognize and record this amount as an interest income to the income statement as below:

December 31:

This journal entry will increase our total assets on the balance sheet and total revenues on the income statement by $6,000 as a result of the $6,000 investment income received from coupon payment of $100,000 bonds.

Sale of debt investment

Sale of debt investment at maturity

At the end of their maturity, we can make the journal entry to record the sale of the debt investments at maturity by debiting the cash account and crediting the debt investments account.

This journal entry will reduce the balance of the investment assets on the balance sheet while increasing our cash balance as a result of the cash inflow from the sale of debt investments at their maturity.

Sale of debt investments before maturity

As mentioned, there is usually a gain or a loss as a result of selling the debt investments before their maturity. In this case, we need to record such gain or loss on the sale of debt investments as a revenue or expense on the income statement for the period.

Gain on sale of debt investments

We will have a gain on the sale of the debt investments when the cash proceeds that we receive from selling the debt investment is more than their carrying value.

In this case, we can make the journal entry to record the gain on the sale of debt investments by debiting the cash account and crediting the gain on sale of debt investments account and the debt investments account.

In this journal entry, the gain on sale of debt investments account is the difference between the cash we receive from the sale of the debt investments and the carrying value of the debt investments at the time of the sale. And the gain on sale of debt investments in this journal entry is usually recorded in the income statement under the other revenues section.

Loss on sale of debt investments

On the other hand, if the carrying value of the debt investments on the balance sheet is more than the cash proceeds that we receive from the sale of debt investments, we will have a loss on the sale of the debt investments.

In this case, we can make the journal entry to record the loss on the sale of debt investments by debiting the amount of loss to the loss on sale of debt investments account as below:

The loss on sale of debt investments in this journal entry will be recorded as other expenses on the income statement. Likewise, this journal entry will decrease total assets on the balance sheet while increasing total expenses on the income statement.

Example

For example, after receiving the coupon interest payment for the third year, we decide to sell the $100,000 debt investments that we purchased previously in the example above in order to obtain immediate cash for our business operation.

However, as we sell the $100,000 debt investments before their maturity, we only receive the cash proceeds of $98,000 resulting in a loss of $2,000 due to the sale of debt investments before their maturity.

In this case, we can make the journal entry to record the $2,000 loss on the sale of debt investments before maturity by debiting this amount to the loss on sale of debt investments account as below:

This journal entry will remove the $100,000 debt investments from the balance sheet as well as recognize the $2,000 loss on sale of debt investments as an expense on the income statement.