Hello, As per below mentioned details : Question : Unrealized gain for 2011 = Fair value at the end of 2011 – Amortized cost at the end of 2011 It is AFS then Why we are using amortized cost why not the fair value at the end of 2010? ----------------------------------------------------------------------------------------- On 1 January 2011, Tinco Ltd. invested $350,000 in debt securities of Simco Ltd. The securities carry a coupon rate of 8% payable annually on par value of $300,000. On 31 December 2011, the fair value of the securities is $390,000. Market interest rate in effect when the bonds were purchased was 6%.Tinco Ltd sells the securities on 1 January 2012 for $395,000. Which of the following most accurately represents the gain recognized on the income statement for 2012 if the company had initially recognized the securities as held‐for‐trading and available‐for‐sale? Held‐for‐Trading Available‐for‐Sale A $5,000 $48,000 B $5,000 $45,000 C $45,000 $48,000 Row A Row B Row C You Answered Incorrectly. Held for trading: Carrying value at the end of 2011 = $390,000 Gain recognized in the income statement = Selling price – Carrying value Gain recognized in the income statement = $395,000 – $390,000 = $5,000 Available for sale: Gain recognized in the income statement = Selling price – Carrying value + Unrealized gain for 2011 Unrealized gain for 2011 = Fair value at the end of 2011 – Amortized cost at the end of 2011 Unrealized gain for 2011 = $390,000 – $347,000 = $43,000 Gain recognized in the income statement = $395,000 – 390,000 + $43,000 = $48,000 Thanks
The face value of the bond is 300,000, but the price paid for it was 350,000. Hence, the premium was 50,000.
Remember that the premiums or discounts are amortized along the life of the debt security, so the value of the bond would be 347,000 at 31 december 2011.
Coupon paid is 300,000 x 8% = 24,000
Interest income is 350,000 x 6% = 21,000
The amortization of premium for 2011 is 24,000 - 21,000 = 3,000.
So, the value of the bond is 350,000 - 3,000 = 347,000 at end of 2011.
The unrealized gain is therefore 390,000 - 347,000 = 43,000
Hope this helps!
Thanks ya it’s a great explanation. So this means what ever the categories bond always carry on amortized cost. I always thought HTM is the category where they carried on amortized cost otherwise fair value.
AFS and HFT securties are displayed at fair value on balance sheet and HTM securities at amortized cost.
In the case of AFS, only realized gain or losses are accounted at the income statement, and unrealized gains or losses on OCI (Other comprehensive income which is part of equity). The realized gain is calculated using fair value difference on the date of sale (395k - 390k), but unrealized gain is calculated using the difference between fair value and amortized cost (390k - 347k).
43k unrealized gain went to OCI at the end of 2011. As the company sold the security the day after (1 January 2012), the price happens to be 395 now and we must reclassify those 43k unrealized gain on OCI and move it to IS, however there is 5k more of gain, so you have final gain of 43k + 5k = 48k which goes to IS.
Hope this helps!
Thanks that is helpful
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