Security Cost 2005 Value 2006 Value 1 $80 $75 $85 2 $20 $30 $35 3 $40 $20 $45 You are assumed to own 100 shares of each firm. Under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” the securities will be classified as either held-to-maturity, available-for-sale, or trading securities. Which of the following statements regarding the income statement and balance sheet treatment of securities classified as held-to-maturity is most accurate? They are carried at: A) fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders’ equity. B) cost on the balance sheet and coupon receipts are considered income. C) cost on the balance sheet with unrealized gains and losses reported in income. I think the answer is B but the coupon thing confused me. Isn’t the interest income technically amortized cost* ytm, or stated differently, coupon +/- amortization?
a is AFS, b is HTM, c is trading. it should be amortized cost, yes, on B/S. as for the amortization running through the I/S… not sure, i would’ve maybe though it’d just be amortized on the B/S and the resulting gain/loss straight through to equity but that is me pulling it out of my #ss. does amortization run through the I/S?
Ans: B pg116 Schweser
on p116 on Schweser: Balance Sheet value is based on amortized cost. on CFAI page 13: income statement: Interest income is AMORTIZED COST * Market rate of interest. this is NOT what was said above, which states it’s just the coupon payment.
“Interest Income is recognized in the income statement” - Schweser same page
not sure what you meant…
nothing to me is terribly wrong with answer B above. it maybe isn’t all inclusive, but it’s def the best answer there by a longshot.
Coupon interest which would be par*coupon rate is definitely not income in held-to-maturity. I think the answer to this question is wrong. Held to maturity includes coupon interest AND the amortized discount (if the security is issued at a discount) or amortized premium (if issued at a premium).