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COMM 353
Oct 11, 2023
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Suppose Terrace sells 20% of its bond investment for $21,000 on June 30, 2017 Most recent FV from Dec.31/2016 : $102,200 « Selling 20% => $20,440 [=20"$1022] must be de-recognized [quote price = $1022] FVPL: What else do we need to make FVPL J/E balance? « Interest income: 6months*$6000*20% = $$600 + Remainder is a "loss on sale of FVPL investment (**)" + Note: Gain(loss) = proceeds net of interest - carrying value = (21,000-600)-20,440 FVOCI: We "recycle" prior gains recorded in OCI into earnings « Take AOCI off B/S (Dr. to equity) + Record gain on I/S = proceeds net of interest - cost « Note: difference between AOCI and Gain = $40 (reflects same loss as under FVPL) Dr. Cash 21000 Dr. Cash 21,000 Dr. Cash 21,000 Dr. Loss on sale of FVPL investment 40 | Dr. AOCI on FVOCI investment (B/S) 440 | Cr. Amortized cost investment 20,000 Cr. FVPL investment 20440 Cr. FVOCl investments 20440 | Cr. Interest income 600 Cr. Interest income 600 Cr. Interest income 600 | Cr. Gain on sale of ** 400 Cr. Gain on sale of FVOCI (/S) 400 | ~ain on sale of amortized cost Investment (S) eequity or debt investment Debt investment only One exception for equity investment: The company can make an "irrevocable election" to classify as FVOCI instead of FVPL - must designate as FVOCI when investment initially acquired - Election as FVOCI is irrevocable - it cannot be reclassified later Equity investments with an "irrevocable election" 'Same as with regular FVOCI: changes in FV are recorded to OCI while holding the investment Different from regular FVOCI: when sell the investment, Any gain or loss goes into OCI (not net income) AOCI for this investment would then directly transfer over to retained earnings -> no recycling of OCI into net income Therefore, gains/losses avoid NI completely Both while holding the investment and once investment is sold REVIEW Amortization of debt instruments + Bond''s face value = principal to be paid in the future at end of bond's life + Bond's present value = what bond sells for today +Principal + interest payments discounted to today's PV Coupon rate = the rate used in periodic interest payments « Interest = coupon rate * face value * Must adjust for payment frequency (annual, quarterly, etc.) Effective interest rate = the current market rate for a bond with similar level of risk
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