Final answer:
Long-term investments in debt securities are reported at cost and adjusted for amortization when they are held-to-maturity securities. The amortization process adjusts the carrying amount of the bond for any premium or discount.
Step-by-step explanation:
Long-term investments in debt securities are reported at cost and adjusted for amortization when the investments are classified as held-to-maturity securities. These securities are meant to be held until they mature, and the investor intends and has the ability to hold them to maturity. Under the amortized cost method, any difference between the initial investment cost and the maturity value (i.e., the premium or discount) is amortized over the life of the bond. This is done using the effective interest rate method, which allocates interest income over the relevant period at a constant rate on the carrying amount of the investment.
The process of amortization serves to adjust the bond investment value on the balance sheet and ensures that interest revenue is properly matched with the periods in which it is earned, adhering to the accrual basis of accounting. This approach aligns with the principle of recognizing financial events when they occur, rather than when cash transactions happen. Therefore, the adjustments for amortization take into account both the time value of money and changes in the market interest rate.