On January 1, 2019, a company's balance sheet reports its investments in debt securities as follows:...

On January 1, 2019, a company's balance sheet reports its investments in debt securities as follows: Assets Investment in HTM securities..... $207,544 Supporting information: The HTM securities are $200,000 face value securities purchased on January 1, 2017, at a yield of 4%. The securities have a 4-year total life and pay interest annually on December 31, at a coupon rate of 6%. Q: Investment in HTM securities reported on the December 31, 2019 balance sheet is: a. $203,846 b. $204,938 c. $207,544 d. $207,997

Expert Solution

Held to Maturity securities are the securities held by the entry with the intention to retain it till its maturity. It is recorded at the cost and a each balance sheet it is shown at the amortised cost. Any discount or premium paid at the time of purchase is amortised over the period of the security. Effective Interest rate amortisation method is adopted for amortisation of discount or premium. The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is lower/higher as compared bond coupon rate then, the bonds were issued at a premium/discount. The premium/discount is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the premium/discount which will be amortised over the term of the bond.

Particulars	Amount
Balance on 1st January 2019	$207,544
Add: Interest @4% [$207544 x 4%]	$8,302
Less: Interest Paid [$200000 x 6%]	($12,000)
Balance on 31st December 2019	$203,846
Correct answer is option (a) i.e $203846

ekkarill92 answered 1 year ago

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