Example: Investment in financial assets At the beginning of the year, Midland Corporation purchased a 9% bond with a face value of $100,000. The bond was issued for $96,209 to yield 10%. The coupon payments are made annually at year-end. Let’s assume the fair value of the bond at the end of the year is $98,500. Determine the impact on Midland’s balance sheet and income statement if the bond investment is classified as held-to-maturity, held-for-trading (or fair value through profit or loss), and available-for-sale. Held-to-maturity. The balance sheet value is based on amortized cost. At year-end, Midland recognizes interest revenue of $9,621 ($96,209 beginning bond investment x 10% market rate at issuance). The interest revenue includes the coupon payment of $9,000 ($100,000 face value x 9% coupon rate) and the amortized discount of $621 ($9,621 interest revenue - $9,000 coupon payment). At year-end, the bond is reported on the balance sheet at $96,830 ($96,209 beginning bond investment+ $621 amortized discount). Held-for-trading. The balance sheet value is based on fair value of $98,500. Interest revenue of $9,621 ($96,209 beginning bond investment x 10% yield-to-maturity at issuance) and an unrealized gain of $1,670 ($98,500 - $96,209 - $621) are recognized in the income statement. ---------------------------------------------------------------------------------------- I don’t get the unrealized gain part for securities HFT. Shouldn’t we recognize an unrealized gain equal to the current fair value of the bond, and it’s price at issuance? For some reason unknown to me, they’ve also included a reduction of value equal to the previous amortized discount on the initial issue outlay. Doesn’t make sense to me.
Because they’re amortizing the discount, they’ll show a _ realized _ gain of $671 and an unrealized gain of $1,670; the realized gain is included in interest income. Thus, the total gain will be $2,341 (= $671 + $1,670 = $98,500 – $96,209).
Ah, makes sense, the $671 is part of interset income and already counted. Thanks.
You’re welcome.
Can u please explain how did you get 671 and not 621?
Good catch. It’s $621.
Interest income of $9000 copoun + $621 principal. Unrealized gain of 98500 - ( 96209 + 621) = $1670
Thank you …