They are reported on the balance sheet at amortized

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Unformatted text preview: urity (HTM). They are reported on the balance sheet at “amortized cost.” Amortized cost (Face amount less unamortized Amortized discount, or plus unamortized premium). Balance Sheet 12-6 Securities to Be Held to Maturity On January 1, 2013, Matrix Inc. purchased as an investment $1,000,000, of 10%, 10-year bonds, interest paid semiannually. The market rate for similar bonds is 12%. Let’s look at the calculation of the present value of the bond issue. Present Value Amount PV Factor $ Interest 50,000 × 11.46992 = $573,496 Principal 1,000,000 × 0.31180 Present value of bonds PV of ordinary annuity of $1, n = 20, i = 6% = 311,805 $885,301 PV of $1, n = 20, i = 6% 12-7 Securities to Be Held to Maturity Partial Bond Amortization Table Date 1/ 1/ 13 6/ 30/ 13 12/ 31/ 13 6/ 30/ 14 12/ 31/ 14 Interest Payment $ 50,000 50,000 50,000 50,000 Interest Revenue $ 53,118 53,305 53,503 53,714 Discount Amortization $ January 1, 2013 Investment in bonds Discount on bond investment Cash June 30, 2013 Cash (stated rate × face amount) Discount on bond investment Investment revenue 3,118 3,305 3,503 3,714 Unamortized Discount $ 114,699 111,581 108,276 104,772 101,059 Carrying Value $ 885,301 888,419 891,724 895,228 898,941 1,000,000 114,699 885,301 50,000 3,118 53,118 12-8 Securities to Be Held to Maturity This investment would appear on the June 30, 2013, balance sheet as follows: June 30, 2013 Investment in bonds Less: Discount on bond investment Book value (amortized cost) $ 1,000,000 111,581 $ 888,419 $114,699 - $3,118 = $111,581 unamortized discount $114,699 - $3,118 = $111,581 unamortized discount Unrealized holding gains and losses are not recognized for HTM investments. 12-9 Securities to Be Held to Maturity On December 31, 2013, after interest is received by Matrix, all the bonds are sold for $900,000 cash. Date 1/ 1/ 13 6/ 30/ 13 12/ 31/ 13 6/ 30/ 14 12/ 31/ 14 Interest Payment $ 50,000 50,000 50,000 50,000 Interest Revenue $ 53,118 53,305 53,503 53,714 December 31, 2013 Cash Discount on bond investment Investment revenue Discount Amortization $ 3,118 3,305 3,503 3,714 Unamortized Discount $ 114,699 111,581 108,276 104,772 101,059 50,000 3,305 December 31, 2013 Cash 900,000 Discount on bond investment 108,276 Investment in bonds Gain on sale of investment 53,305 1,000,000 8,276 Carrying Value $ 885,301 888,419 891,724 895,228 898,941 12-10 Trading Securities Investments in debt or equity securities acquired principally for the purpose of selling them in the near term. Adjustments to fair value are recorded 1.in a valuation account called fair value adjustment, or as a direct adjustment to the investment account. 2.as a net unrealized holding gain/loss on the income statement. Unrealized Gain Unrealized Unrealized Loss Income Income Statement 12-11 Trading Securities Matrix Inc. purchased securities classified as Trading Matrix Securities (TS) on December 22, 2013. The fair value amounts for these securities on December 31, 2013, are shown below. Prepare the journal entries for Matrix In...
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This document was uploaded on 03/12/2014.

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