Accelerated Market Discount recognizes deferred market discount and cost adjustments on principal repayments for securities purchased at a discount. When the system processes any of these repayments, the Accelerated Market Discount method first reduces amortization . Thenthen, once fully reduced to zero, cost is reduced to zero. Once cost is reduced to zero by principal repayments, the remaining proceeds are recognized as a gain or loss.
Example 1 – Remaining Deferred Exceeds Paydown Proceeds
As principal payments occur, the entire principal payment is applied to income when the amount of deferred market discount on the tax lot is greater than or equal to the amount of the principal payment (Example 1).
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Proceeds are less than remaining deferred amortization (i.e. For example, 1,000) so the entire proceeds will be recorded as amortization income and book cost will remain unchanged.
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