chapter 4a income exclusions bonds and original issue discount edited september 14 2008 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 4A Income- Exclusions Bonds and Original Issue Discount Edited September 14, 2008 PowerPoint Presentation
Download Presentation
Chapter 4A Income- Exclusions Bonds and Original Issue Discount Edited September 14, 2008

Loading in 2 Seconds...

play fullscreen
1 / 19

Chapter 4A Income- Exclusions Bonds and Original Issue Discount Edited September 14, 2008 - PowerPoint PPT Presentation


  • 71 Views
  • Uploaded on

Chapter 4A Income- Exclusions Bonds and Original Issue Discount Edited September 14, 2008. Original Issue Discount . Pg. 114 Some debt instruments are issued at prices below their maturity values

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 4A Income- Exclusions Bonds and Original Issue Discount Edited September 14, 2008' - zanthe


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide2
Original Issue Discount. Pg. 114
  • Some debt instruments are issued at prices below their maturity values
  • This original issue discount (OID) is effectively interest paid at maturity rather than periodically over the debt instrument’s life
  • Both cash and accrual basis taxpayersrecognize OID income as it accrues
    • Exception: Series EE bonds
slide3
Market Discount.
  • Bonds purchased after issue in the open or secondary market at a price below maturity value.
    • Excess of redemption proceeds over cost is recognized as ordinary income in year of redemption.
    • Electively, market discount can be accrued as interest income over life of bond.
slide4

Bond IIlustration – Slide 1 of 11

On 1-1-07, issue $100,000 of bonds.

On 12-31-08 the bonds will mature.

Bonds have stated interest of 10%. Bonds pay interest of $5,000 each 6 months. On 1-1-07, Bob buys the bonds from the Corp. at a price to yield 12% (semi-annual compounding). Compute price paid by Bob by discounting cash flows at 6% per interest period.

slide7

Bond IIlustration – Slide 4 of 11

Prepare amortization table.

Note: The PV factors on preceding page were computed with Excel. These factors are a little more accurate than those taken from tables (because of rounding in the tables).

slide13

Bond IIlustration – Slide 10 of 11

How much income is recognized by Bob in first year?

slide14

Bond IIlustration – Slide 11 of 11

How much income is recognized by Bob in first year?

$5,792.09 plus $5,839.62.

---------------------

If the company calls the bonds at a price of 100 on June 30, 2007, what is Bob’s gain or loss.

slide15
CPA Exam Question

On Jan. 1, 2007, Carr Corp purchased Fay Corp. 9%. 10-year bonds with a face amount of $400,000 for $375,600, to yield 10%.

The bonds are dated January 1, 2007, mature on December 31, 2015, and pay interest annually on Dec. 31.

Carr uses the interest method of amortizing discount.

What is Carr’s interest revenue for 2007?

$40,000 b. $37,560 c. $36,000 d. $34,440

(Source: CPA)

Ignore some rounding in the price computation