Problems about an example on Kaplan Notes

X

xlin12

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Hi there,
I am quite confused by the first example on the Kaplan Notes for intercorporate investments part.
The original words of the example is as belows:
“Now let’s imagine that the bonds are called on the first day of the next year for $101,000. Calculate the gain or loss recognition for each classification.
Held-to-maturity: A realized gain of $4,170 ($101,000 - $96,830 carrying value) is recognized in the income statement.
Held-for-trading: A net gain of $2,500 ($101,000 - $98,500 carrying value) is recognized in the income statement.
Available-for-sale: The unrealized gain of $1,670 is removed from equity, and a realized gain of $4,170 ($101,000 - $96,830) is recognized in the income statement.”
But since available-for-sale is recognized at fair value on BS at the end of first year,I wonder where $96,830 comes from ? Should it be $98.500, the carrying fair value ?
Thanks for any help !
 
I suspect that $96,830 is the original purchase price.
For AFS securities, the entire gain (sales price less purchase price) is recognized on the income statement when the security is sold.
 
Hi S2000magician, thanks for replying! I didn’t put the former part of the example. But as far as I can tell, $96,830 is the amortized cost of HTM debt securities.
This is the former part of the example for your reference.
Example: Investment in financial assets
At the beginning of the year, Midland Corporation purchased a 9% bond with a face value of $100,000. The bond was issued for $96,209 to yield 10%. The coupon payments are made annually at year-end. Let’s suppose the fair value of the bond at the end of the year is $98,500.
Determine the impact on Midland’s balance sheet and income statement if the bond investment is classified as held-to-maturity, held-for-trading (or fair value through profit or loss), and available-for-sale.
Answer:
Held-to-maturity. The balance sheet value is based on amortized cost. At year-end, Midland recognizes interest revenue of $9,621 ($96,209 beginning bond investment x 10% market rate at issuance). The interest revenue includes the coupon payment of $9,000 ($100,000 face value x 9% coupon rate) and the amortized discount of $621 ($9,621 interest revenue - $9,000 coupon payment).
At year-end, the bond is reported on the balance sheet at $96,830 ($96,209 beginning bond investment + $621 amortized discount).
Held-for-trading. The balance sheet value is based on fair value of $98,500. Interest revenue of $9,621 ($96,209 beginning bond investment x 10% yield-to-maturity at issuance) and an unrealized gain of $1,670 ($98,500 — $96,209 — $621) are recognized in the income statement.
Available-for-sale. The balance sheet value is based on fair value of $98,500. Interest revenue of $9,621 ($96,209 beginning bond investment x 10% yield-to-maturity at issuance) is recognized in the income statement. The unrealized gain of $1,670 ($98,500 — $96,209 — $621) is reported in stockholders’ equity as a component of other comprehensive income (U.S. GAAP) or direct to equity (IFRS).
 
OK, so $96,830 is the original price plus ($96,209) plus the amortization of the discount ($621).
 
I am sorry,just one more bother. Should AFS securities be recognized in the balance sheet based on fair vlaue? Appreciate your reply!
 
Yes, both HFT and AFS securities are recognized at fair value on the balance sheet.
The difference is that for HFT securities, unrealized gains/losses are reported on the income statement, while for AFS securities, unrealized gains/losses are not reported on the income statement. Thus, when HFT securities are sold, only the last incremental gain/loss is reported on the income statement, while when AFS securites are sold, the entire gain/loss since inception is reported on the income statement; in both cases, that reported gain/loss does not include any portion that was already amortized.
 
Appreciate your reply ! I just got the idea.
 
You must log in or register to reply here.
Back
Top