Question

Identify the underlying characteristics of debt instruments and describe the basic approach to accounting for debt. Be specific.

Answer 1

Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds,leases,debentures etc... .Debt instruments provide capital to an entity that promises to repay the capital over time.

the main or underlying characterestics of debt instruments is Issuer is obliged to pay a specified amount of principal and interest to the owner  and the income recieved is characterised as interest income.

the quantitavtive characteristcs of a debt instrument normally consists of an issue date, on which the debt security is issued,an issue price, at which investors buy the debt securities when first issued,a redemption (or maturity) date, on which the final contractually scheduled repayment of the principal is duea redemption price or face value,which is the amount to be paid by the issuer to the holder at maturity,an original maturity, which is the period from the issue date until the final contractually scheduled payment;a remaining (or residual) maturity, which is the period from the reference date until the final contractually scheduled payment;

basic approach to accounting for debt instrument is that debit the instrument purchased as the asset account and credit the cash account if it was bought by cash or credit accounts payable if it was a credit purchase. purchase price included is the market price paid for the bond and any investment fees or broker's commissions.

consider an example of purchasing a bond - five of the 10%, ten‐year $1,000 bonds issued by ABC company on January 1 for $7500 and pays broker's fees of $100. the accounting treatment of purchase of bond from ABC co will be

date	accounts title	debit	credit
jan 01	debt instrument-bond	7600
	cash		7600