In principle, interest should be accrued on the bank's investments as well as on its loans, but in practice it is not usually done, because the interest payable dates on the bank's investments are generally pretty well spread over the year. However, the principle involved in the accrual of interest on securities and investments might well be illustrated. Suppose United States bonds are purchased at a premium, that is, above par. As it is undesirable, and in fact incorrect, to set up a United States bond on the books for more than its par value, the entries made for the purchase of United States bonds at $1,000 par and premium $100 are:

The premium on bonds is properly wiped out as interest is collected and as the bond approaches its maturity date. This is done on the principle that if the bond is selling above par, the purchaser pays the premium because of the high interest rate compared with the safety and other virtues of the bond. The entries on each interest maturity date are as follows:

Assume that the interest is 5% and that the basis of yield on the investment is $4.50, the entries to cover the receipt of the $5 interest payment are as follows:

There is another point which should be explained in this matter of accrued interest on bonds. Assume that a $100 6% bond is purchased midway between its coupon payable dates, that is, that there is $1.50 accrued interest on the bond. The proper entries to cover that purchase are:

The foregoing illustration implies that the bond is purchased at par. On the interest payable date, namely, on the date on which the $3 coupon is clipped and collected, the entries are as follows: