 Hello and welcome to the session in which we will discuss health to maturities category that is part of the debt investment. So if you invest in debt, you could have your investment categorized under three parts, either health to maturity, trading or available for sale. And this is what we discussed in the prior session. We gave an overview about that investments as well as equity investment. In this session, we're going to focus on health to maturity and we'll focus on trading available for sale. Then we would look at the equity section. So what is health to maturity securities? Well, when is it used? Well, it's used when the company has the intent and ability to hold the investment until it mature. Well, remember, the only thing that mature are bonds, debt security. So you don't have stocks in this category, okay? Because stocks or equity investments don't mature. Now, how do we account for HTM? How do we account for these investments at amortized cost, not fair value? And we explain why in the prior session, because if you hold the bond until it mature, you will always get the face value. So if you hold the bond and the bond goes up in value and it goes down, then it goes down, it goes up, then it's up, down, up, up, down. At the end, it's going to come back to the face value. Therefore, ignore all these fluctuations because if you're holding it, you're going to get the face value. That's the purpose. And what do we do? We're going to amortize any premium or discount using the effective interest rate method, generally speaking. Why do we amortize using the effective interest rate method? Because that's the method that's based on the balance of the bond, the book value of the bond. And you might, the reason is you might buy the bond at a premium or you might buy it at a discount, just amortize it. And I hope you are familiar with premium and discount amortization because we learn about how we discount bonds in the bond section. If not, please go to forehead lectures to see how we do so. The best way to illustrate this is to actually look at an example. Aram Company purchased 100,000, 8% bond of forehead lectures January 1st, 20x0, paying 92,278. Now, without telling you this, you know, this is a discount bond because the bond is a $100,000 bond. You purchase it below the face value. Therefore, it's a discount bond. The bond matures in five years on January 1st, 20x5. The bond yields 10%. Obviously, because it yields 10%, it was sold at a discount, okay? Because the interest rate, the market rate is 10%. So the purchaser, Aram Company discounted that bond at 10%. And the interest is payable semi-annually July and January. Now, when you buy a bond, what do you have to do? You have to account for the purchase. You have to account for any interest received. Then if you sell the bond, you sell the bond, you have to account for the gain or the loss. And this is what we're going to be doing. First, buying the bond. Well, the bond, now it's a debt investment. So notice I did not mention the word bond. It's a debt investment. It's an asset versus bonds payable. When we sell a bond, when the company sells a bond, that's a liability. Two different things. I mean, in my classes, always students, they debit bonds payable. No, you are buying an investment. You are not reducing your liabilities when you buy a bond. And you credit cash. You purchase it for 92,278. This is on January 1st, 20x0. And this is your cost. This is how much you paid for that bond. Just any other asset, when you buy it initially, you would record it at its cost. Then what companies would do, just like when you buy a bond, you prepare an amortization schedule. And this is what an amortization schedule looks like. I'm going to go over this amortization schedule. However, if you are not familiar with this, by all means, go back to my bonds chapter and learn about bonds. Well, first, the carrying value of the bond. When you buy the bond, the carrying value is the cost, which is a discounted bond. Then six months later, on July 1st, the bond will make its first payment. You would receive $4,000 in cash. Why 4,000? Well, the bond is $100,000. 8% bond pays interest semi-annually. Well, 100,000 times 8% times 612, the cash received is $4,000. Now, we need to know what's the interest revenue. The interest revenue is $4,614. How do we compute the interest revenue? We'll take the bond carrying value as of the beginning of this period, $92,278, multiplied by the market rate, multiplied by one half for six months. Therefore, interest revenue is $4,614. Well, this is the interest revenue that you are going to be recording. The cash that you received, only $4,000. The difference between them is the amount you're going to be amortizing. So the difference is the amount you're going to be amortizing, which is $614, the difference between them. Now, you're going to take the $614 and add it to the previous carrying value, and the carrying value goes up to $92,894. And this process would repeat itself. Well, January 1st, second interest payment is $4,000. Notice the cash is always the same. Interest revenue based on the previous carrying value times 10% times the market rate. The difference between them is the discount bond, then the bond carrying value will go up to $93,537. And if we keep going through this process until January 1st, 20x5, by the time the bond matures, notice it goes back to $100,000. Before we proceed any further, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. I don't replace your CPA review course. What I'm going to be doing is I'm going to be a supplemental material, a useful addition to your CPA review course as well as your accounting course. My motto is saving accounting students and CPA candidates one at a time. How so? I provide resources, lectures, multiple choice, true, false, additional exercises. And this is a list of my accounting courses. My CPA material are aligned with your Becker, Roger, Gleam, Wiley, and so on and so forth. So it's very easy to use my material along your CPA review course. I also give you access to all 1,500 previously released AI CPA questions with detailed solution. Don't shortchange yourself. Take a look at my material. If you have not connected with me on LinkedIn, please do so. And take a look at my LinkedIn recommendation like this recording, share it with other. It helps me a lot. Connect with me on Instagram, Facebook, Twitter, and Reddit, especially on Instagram. I'm trying to grow my following. Now, let's take a look at the first journal entry that's going to take place July 1st, 2020 X zero, which is this period right here, this period right here. Well, what did we do on July 1st? We received cash of $4,000. We're going to credit interest revenue 4,614, which we computed earlier. The difference will be the debt investment. So notice what we do. We're going to increase our debt investment by 614. And period after period, what's going to happen? The amount that we amortize, it's going to increase our carrying value until the carrying value becomes 100,000. And this is what we meant by keep your bond, if it's held to maturity, at maturity as amortized cost. Why? Because at the end of the life of the bond, you're going to get 100,000. Now, on the way there, it might fluctuate, but we will ignore those fluctuation. Let's take a look at the second payment that takes place on January 1st. Well, before we get to January 1st, we have December 31st as year end. This is what we're going to be assuming. So by year end, we have to accrue the $4,000 that we're going to be receiving on January 1st. We're going to have to accrue the interest revenue of 4,645 computed as the prior carrying value times 10% times 1 half. And the difference will be that that investment increasing our carrying value. What's reported on the financial statement? On the balance sheet, we are going to have interest receivable right here, $4,000. We're going to have an investment in bonds at 93,537, December 31st, 2020 X0. On the income statement, we're going to report interest revenue 4,614 received in cash 4,645. We accrued, we accrued right here. We accrued right here. Together, we would report interest revenue of $9,259. What happened if Adam Company sell its investments on November 1st, 2020 X4. So November 1st is someplace in here toward the end of the life of the bond, which is not a big deal. The bond almost almost mature at 99.8%. It means 100,000 times 0.998 plus accrued interest because the investor would like to get the accrued interest. Now the first thing we have to do, if that's the case, when we retire a bond, we have to do, we have to bring the carrying value. Because the carrying value as of July was $99,048. Why do we need to do so? Because the carrying value will determine whether we have a gain or a loss because we sold this investment. Well, we're going to take the carrying value from $99,048, bring it to November 1st, carrying value. How so? Well, we have to prorate this $952 of discount. So the amount of discount from July till January is $952. We're going to take this amount multiplied by $46, which is for July, August, September and October, for month. And that's going to give us $635. The first thing we do is we update the carrying value of the bond. We debit the investment, credit interest revenue for $635. So now our bond is up to date. Now we can determine whether we have a gain or a loss. We sold the bond, not including the interest for $99,800, which is $100,000 times .998. Then the bond carrying value was July 1st, $99,084 plus $635. The carrying value is $99,683. Well, we sold it for more than the carrying value for $117. We have a gain. Let's generalize the entry to determine the full picture. Cash that we will receive is $102,417. Hold on a second. We only sold it for $99,800. Well, we also have to receive $4,000 prorated for 612. Why? Because when we sell the bond, remember, whoever buys the bond will get the interest. Well, before selling the bond, we want the cash now because by the time the bond makes the next interest payment, when they pay the $4,000, we no longer have the bond. Therefore, we want our money that accrued from July till November 1st. From July 1st till November 1st, and that's $4,000 times $4,600. And this is why if we take $99,800 plus $2,667, and that should give you the amount of the cash we are going to be receiving, we credit the debt investment for the full amount of the carrying value. We computed the carrying value. Now we remove it and again takes a credit. We record the gain on sale of the investment. This is an actual realized gain of $117. What should you do now as an accounting student or a CPA candidate? Go to my website, farhatlectures.com. Practice MCQs. Look at additional resources for this topic to strengthen yourself, to make yourself more comfortable. Invest in yourself. My subscription will not break you. Give me a chance for a month. If you see a difference, you keep it. If you don't see a difference, you cancel. You lost one month. That's the maximum you would lose. You're not under any contract. The CPA exam is worth it. Study hard, good luck, and invest in yourself.