If the fair value changes to $950, but the carrying value for yr 2 is $930, what should the interest income for yr 2 be calculated on, $930 or $950 for available for sale and held for trading securities?
interest income for debt securities is calculated the same way for all debt securities (including any discount/premium at time of purchase), regardless of classification. here’s a video which walks through this quite nicely: https://youtu.be/fQ1tG2EbxRU?t=1
the unrealized gain/loss (which will be included in either P&L or OCI, depending on if the debt security was classified as held-for-trading or available-for-sale) effectively acts as a “plug” to balance the balance sheet.
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On the left side of the balance sheet:
- Cash goes up by coupon payment
- Carrying value of bond changes by the change in Fair Value from year to year
On the right side of the balance sheet:
- Net Income goes up by interest income which is simply Coupon Payment less Amortization. (If we’d purchased the bond at a discount, it would be Coupon Payment add Amortization.)
- The unrealized gain/loss takes into account the change in Fair Value and the Amortization. (Note: the coupon payment is already reflected on both sides of the balance sheet, under cash and net income.)