...
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.
Units | Current Original Cost | Def Market Discount | Cash Proceeds (at par) |
85,000 | 75,000 | 1,000 | 500 |
Proceeds are less than the remaining deferred amortization (For example, 1,000) so the entire proceeds will be recorded as amortization income and book cost will remain unchanged. The remaining deferred amortization will be reduced by the recorded amortization.
Units – Post | Current Original Cost – Post | Def Market Discount - Post |
84,500 | 75,000 | 500 |
Ledger Account | Dr | Cr |
Investment Receivable | 500 |
|
Amortization Income |
| 500 |
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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.
Units | Current Original Cost | Def Market Discount | Cash Proceeds (at par) |
85,000 | 75,000 | 1,000 | 1,500 |
Proceeds are greater than remaining deferred amortization so the entire deferred amount will be recorded as amortization income and book cost will be reduced by the remainder. The remaining deferred amortization will be reduced by the recorded amortization and will end at 0.
Units – Post | Current Original Cost – Post | Def Market Discount - Post |
83,500 | 74,500 | 0 |
Ledger Account | Dr | Cr |
Investment Receivable | 1,500 |
|
Amortization Income |
| 1000 |
Cost |
| 500 |
...
If the principal payment is greater than the remaining cost and deferred market discount, record the remaining amount as a capital gain.
Units | Current Original Cost | Def Market Discount | Cash Proceeds (at par) |
15,000 | 5,000 | 500 | 10,000 |
Proceeds are greater than remaining deferred amortization and the remaining book cost so the entire deferred amount will be recorded as amortization income, book cost will be reduced to zero, and the remainder will be recorded as a capital gain.
Units – Post | Current Original Cost – Post | Def Market Discount - Post |
5,000 | 0 | 0 |
Ledger Account | Dr | Cr |
Investment Receivable | 10,000 |
|
Amortization Income |
| 500 |
Cost |
| 5,000 |
Cap Gain |
| 4,500 |