Recognition of Income Examples

Accelerated Market Discount recognizes deferred market discount and cost adjustments on principal repayments for securities purchased at a discount. When these repayments are processed, the Accelerated Market Discount method first reduces amortization. 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. Deferred market discount is tracked using Amortization at Disposition fields.

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.

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.

Paydown Proceeds Exceeds Remaining Deferred

When the principal payment is greater than the remaining amount of deferred market discount, the system records the remaining amount as a reduction of current original cost.

In this scenario, proceeds are greater than remaining deferred amortization so the entire deferred amount is recorded as amortization income and book cost is reduced by the remainder. The remaining deferred amortization is reduced by the recorded amortization and ends at 0.

Paydown Proceeds Exceeds Remaining Deferred and Cost

If the principal payment is greater than the remaining cost and deferred market discount, the system records the remaining amount as a capital gain.

In this scenario, proceeds are greater than remaining deferred amortization and the remaining book cost so the entire deferred amount is recorded as amortization income, book cost is reduced to zero, and the remainder recorded as a capital gain.