CFAi Reading 19 Q17

CFA Level II FRA
#1

#next_pages_container { width: 5px; hight: 5px; position: absolute; top: -100px; left: -100px; z-index: 2147483647 !important; } Hi everyone,

On question 17 p. 162, I got a bit confused.

We are asked to compare the reported interest income if the historical cost stays the same but the par value is changes (in comparison to the initial wording of the item set where all securities were acquired at par value)

A) Bugle bought it for $25 000 and par value is $28 000 => Bought at discount to Par so the discount amortization will be added to the interest payment, thus interest income will be higher not lower

B) Cathay bought it for $40 000 and par value is $37 000 => bought at a premium to Par so the premium amortization will be subtractact to the interest payment, thus the interest income for confabualted would be LOWER.

C) Dumas bought it for $50 000 and par value is $55 000 => bought at discount to par so the discount amortization will increase the interest income like in option A.

Is that right? or Do I get this wrong

PS: Since Bugle is an Available for Sale type of financial investement. When it was initially purchased was it recorded on the B/S at Fair value or historical cost?

Thanks for your help?

#2

Correct me if I’m wrong.

The way I see the answer is that since the par vale is lower, i.e. the base amount is lower, the interest will be lower, hence B is right.

For Available for sale type of investment, it’s initially recorded at fair vale + transaction cost, and subsequent changes are recorded under OCI.