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No ledger entries are required for the principal loss component as there is no impact on cost.
Pre Paydown Totals
Units | Cost | Def Market Discount | Mkt Dis |
1,000,000 | 950,000 | 10,000 | 40,000 |
Paydown Units | Cash Proceeds | Loss Factor |
10,000 | 8,000 | 2,000 |
The loss factor of 2,000 is processed as a quantity reduction with no impact on deferred market discount or cost as there is sufficient unamortized discount (For example, 40,000) to absorb the full loss factor.
Totals after applying loss factor
Units | Cost | Def Market Discount | Mkt Dis |
998,000 | 950,000 | 10,000 | 38,000 |
Next apply the proceeds quantity of 8,000 as recognition of deferred market discount. There is no remaining proceeds so no impact on cost or realized gain.
Ledger Postings
Debit | Credit | |
Amortization Income |
| 8,000 |
Investment Receivable | 8,000 |
|
Post Paydown Totals
Units | Cost | Def Market Discount | Mkt Dis |
990,000 | 950,000 | 2,000 | 38,000 |
Prior Cost Reduction | Prior Def Mkt Discount Reduction |
0 | 0 |
Loss Factor is Greater than the Amount of Unamortized Discount but Less than the Total of Unamortized Discount and Deferred Market Discount
Apply In this scenario, the system applies loss factor as a reduction of quantity and reduce reduced deferred market discount for the amount of loss factor that is greater than the unamortized discount.
Pre Paydown Totals
Units | Cost | Def Market Discount | Mkt Dis |
1,000,000 | 980,000 | 15,000 | 5,000 |
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As there is sufficient unamortized discount and deferred market discount to absorb the loss factor there is no impact on cost and no ledger entries for the loss factor amounts. The amount of deferred market discount is has been reduced but because the amount has not been posted to income, there is no adjustment from an accounting perspective other than to reduce the amount of deferred available for realization as the proceeds portion of the paydown is processed.
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Loss Factor is Greater Than the Total Unamortized Discount and Deferred Market Discount
Apply In this scenario, the system applies loss factor as a reduction of quantity and reduce reduces deferred market discount to zero. The remaining loss factor results in a realized capital loss.
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The loss factor of 25,000 reduces the market discount by 5,000 to zero, reduces the deferred market discount by 15,000 to zero, and reduces cost and creates a realized loss for the remaining 5,000.
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| Credit | |
Loss | 5,000 |
|
Cost |
| 5,000 |
Totals after processing loss factor but prior to applying proceedsProcessing Loss Factor but Prior to Applying Proceeds
Units | Cost | Def Market Discount | Mkt Dis |
975,000 | 975,000 | 0 | 0 |
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Prior Cost Reduction | Prior Def Mkt Discount Reduction |
5,000 | 15,000 |
As the lot is now at par, the proceeds proceed amount of 8,000 will be reduce is at reduced cost and produce produces no recognition of income.
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There is a 25,000 principal paydown and a 10,000 non cash increase in quantity for the recovery factor which equates to a 15,000 net decrease in quantity. The loss recovery quantity will increase increases the total quantity by 10,000 prior to processing the cash based paydown of 25,000.
Loss factor is processed first which increases the quantity by 10,000 and reverses the total prior loss of 5,000 and . It then then increases the deferred market discount by the remaining 5,000 of the recovery amount reducing the amount of deferred market discount available for future recoveries to 10,000.
If there are no remaining losses to reverse or prior reductions of deferred market discount to reverse, recoveries should produce an increase to par which re-establishes an unamortized discount.
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