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 then. Then, 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.
Examples
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 (For example, i.e. 1,000) so the entire proceeds will be recorded as amortization income and book cost will remain unchanged.
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Units – Post | Current Original Cost – Post | Def Market Discount - Post |
84,500 | 75,000 | 500 |
Ledger
...
Postings
| CrCredit | |
Investment Receivable | 500 |
|
Amortization Income |
| 500 |
Example 2 – Paydown Proceeds Exceeds Remaining Deferred
When the principal payment is greater than the remaining amount of deferred market discount, record the remaining amount as a reduction of current original cost (Example 2).
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Units – Post | Current Original Cost – Post | Def Market Discount - Post |
83,500 | 74,500 | 0 |
Ledger
...
Postings
| CrCredit | |
Investment Receivable | 1,500 |
|
Amortization Income |
| 1000 |
Cost |
| 500 |
Example 3 – Paydown Proceeds Exceeds Remaining Deferred and Cost
If the principal payment is greater than the remaining cost and deferred market discount, record the remaining amount as a capital gain (Example 3).
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Units – Post | Current Original Cost – Post | Def Market Discount - Post |
5,000 | 0 | 0 |
Ledger Postings
Ledger Account | DrDebit | CrCredit |
Investment Receivable | 10,000 |
|
Amortization Income |
| 500 |
Cost |
| 5,000 |
Cap Gain |
| 4,500 |