How is interest recognized on debt investments that are expected to be held for their contract...

How is interest recognized on debt investments that are expected to be held for their contract life?

Expert Solution

Investments that are expected to be held for their contract life are the investments that are held for maturity. The investments that are held for maturity are recognised initially at the the cost including the transaction costs. when there is a difference between the market interest rates and the stated interest rates, there will be difference between the purchase price and the face value of the investments resulting in the recognition of the discount or premium.

The interest on held to maturity investments are recognized by using effective rate of interest method. The interest income value o be recognized is calculated by multiplying the opening carrying value of the investment with the periodic market interest rate which is shown as follows

Interest Income = Opening carrying value of investment * Periodic market interest rate

Coupon = Par Value * Periodic Quoted interest rate

The difference between the interest income recognized and the coupon is the periodic ammortzation of the debt investment discount or premium

ekkarill92 answered 2 years ago

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