[StudyingHard]

I have a question relating to Debt Securities classified as Trading and Available-For-Sale

For AFS Debt Securities- I understand that they are marked to market value by recognizing an Unrealized Gain/Loss in OCI and increasing the value of the debt security via a debt/credit to the actual security or using a valuation account.

Now if a $100,000 face value debt security is purchased for say at a discount or premium at 1/1/01. Lets say for this example at a discount of $92,000 with annual interest payments and is classified as AFS.

1. Does the holder still amortize the discount as usual and recognize interest revenue throughout the year?. Which would also increase the carrying amount?

Now, at year end lets say the carrying amount is now $94,000 after amortization. As with securities classified as AFS, we mark to market the security by comparing it to its fair value. Let’s say the fair value is $98,000. So then then we would Debt the valuation account of $4,000 and Credit Unrealized Gain on AFS for $4,000 and report the gain in OCI/AOCI for the year. Am I dong this correct so far?

End of year 1, moving forward and we’re now at the end of Year 2. We should continue to amortize the debt security for one more year. Lets say further amortization brings the carrying value to $96,000. ($94,000 in Year 1 and now to $96,000 in Year 2). Now time to mark to market the debt security. For simplicity reasons, lets assume that the fair value at the end of Year 2 has not changed and is still $98,000. Previously for Year 1, we had a carrying value of $94,000 plus $4,000 recognized in OCI/AOCI totaling $98,000 fair value. But now at the end of Year 2 we have a carrying value of $96,000 plus $4,000 that was recorded in Year 1 which would total to $100,000.

If the fair value at the end of Year 2 has not changed and is still $98,000. Would this require a year end adjustment for Year 2 of $2,000? Debt Unrealized Loss and Credit Valuation for $2,000 so that the fair value is marked to market at $98,000.

Same with trading debt securities. However, with trading we recognize gains and losses on the income statement and not OCI/AOCI. But still at year end the valuation of the debt security at the end of Year 2 after amortization would still make the value of the debt security greater by $2,000. So would the holder then make an adjustment at the end of Year 2 of $2,000 loss on the income statement to mark the debt security to its fair value?

Please help and thank you!!

-StudyingHard