Can someone please help me with the calculation of unrealised gains. I’m a little confused here…
ABC company invested $350,000 in securities of X co. on 1,Jan 2010. coupon rate is 8% on par value of 300,000. FV on 31, Dec 2010 is 390,000. Market interest rate at the time of purchase if 6%. what is the unrealised gain on 31, Dec 2010 if it is recognised as AFS?
I’ve learnt that unrealised gains will be 390,000(FV) - 347,000 (amortised cost) = 43,000.
My question is…
a. Suppose the FV of the investment is say 400,000, as of 31 Dec 2011. what will be the unrealised gain recogined on 31.dec 2011
b. If the investment is sold for 400,100. what is the gain recognised on the IS for 2011?
Unrealized gain/loss is the fair market value less the basis. The basis is the cost (or previous FMV, if you had previous unrealized gains/losses) adjusted for amortization.
I’m not sure how they calculated the $3,000 amortization (maybe that was given), but the calculation is consistent with what I wrote above: FMV less basis; in this case, the basis is the cost less the amortization.
It would be $400,000 – $347,000 = $53,000. Makes sense: the FMV has increased by $10,000 (over the $390,000 given), and the unrealized gain has increased by $10,000. Ipso facto.
For available-for-sale securities, all of the unrealized gains/losses go direct to equity (as OCI), bypassing the income statement. When the security is sold, the net unrealized gain/loss is reversed out of OCI, and the entire gain/loss is recorded on the income statement. Thus, the gain would be $400,100 – $347,000 = $53,100.
I got: 0.08*300000=24,000 coupon payment; 0.06*350,000=21,000 interest revenue. The difference $3,000 goes to bond aomrtisation. Therefore, the amortised cost is 350,000-3,000=347,000.