FAR · Select balance sheet accounts · 6 practice questions
Held-to-maturity debt: amortized cost and CECL allowance
Held-to-maturity debt is reported at amortized cost net of any credit-loss allowance; fair value changes are not recognized. Below: one worked calc and 9 practice questions to lock the steps.
Try one first
Hint
Start by classifying the investment based on the type of security and management's stated intent and ability, then match that classification to its measurement basis.
Answer A. The facts (positive intent and ability to hold to maturity) classify the debt security as held-to-maturity. Held-to-maturity debt securities are measured at amortized cost on the balance sheet; because the fair-value option was not elected and no credit loss exists, amortized cost is the reporting basis.
Why not B: This describes available-for-sale debt securities, which are measured at fair value with unrealized gains and losses in OCI. Here, management's stated intent and ability to hold to maturity indicate a held-to-maturity classification instead.
Why not C: That treatment applies to trading debt securities (and some other securities measured at fair value through earnings). The fact pattern specifies intent and ability to hold to maturity, which points to amortized cost rather than fair value through earnings.
Why not D: U.S. GAAP does not apply a generic lower-of-cost-or-fair-value rule to held-to-maturity debt securities. The appropriate basis is amortized cost, subject only to credit-loss guidance if impairment exists.
Worked example
On 1/1/X1, Fox Co. buys a $200,000 par bond for $208,000. Coupon 7% paid annually; effective yield 5%. Fox classifies it as HTM and does not elect fair value. At 12/31/X1, Fox expects $1,800 of lifetime credit losses. Ignore accrued interest presentation.
| 1 | Beginning amortized costPurchase price | $208,000 |
| 2 | Effective-interest revenue (Year 1)$208,000 × 5% | $10,400 |
| 3 | Cash interest received$200,000 × 7% | $14,000 |
| 4 | Premium amortized (reduces carrying)$14,000 − $10,400 | $3,600 |
| 5 | Amortized cost at 12/31/X1$208,000 − $3,600 | $204,400 |
| 6 | Less: CECL allowance at 12/31/X1Allowance reduces carrying amount | $1,800 |
Report the HTM bond at $202,600 (amortized cost $204,400 less $1,800 CECL allowance).
Check: Because coupon > yield, the premium amortizes and carrying amount moves down toward $200,000; fair value changes do not affect the reported amount.
Key points
- Use the effective-interest method when a yield is given; premiums reduce interest income and carrying amount, discounts increase them.
- Accrued interest receivable is presented separately from the investment account.
- End-of-period carrying amount = prior amortized cost ± premium or discount amortization − the CECL allowance.
- Market-rate changes do not change HTM carrying amount; fair value is disclosed. Recognize only expected credit losses via an allowance; do not remeasure HTM to fair value.
- Transfers from AFS to HTM are recorded at fair value on the transfer date; related AOCI stays and is amortized as a yield adjustment.
- HTM classification requires positive intent and ability to hold to maturity at classification.
How the exam traps you
- Reporting HTM debt at fair value with unrealized gains or losses in OCI. HTM stays at amortized cost. OCI applies to AFS debt, not HTM.
- Ignoring the CECL allowance for HTM when credit risk exists. Record an allowance for expected credit losses and present HTM net of that allowance.
- Using straight-line amortization when an effective yield is given. Compute interest income at the effective rate and amortize the premium or discount as the difference from cash interest.
- Writing HTM down to the lower of cost or market when fair value falls. Do not apply lower-of-cost-or-market to HTM. Recognize only expected credit losses via an allowance.
Question 2
Hint
First determine the proper classification of the debt security under current GAAP, then apply the measurement basis that goes with that classification.
Answer A. These bonds qualify as held-to-maturity because Pacer has the positive intent and ability to hold them to maturity, so they are measured at amortized cost rather than fair value absent a credit loss. The carrying amount at December 31, 20X5 is the purchase price of $970,000 plus $5,000 of discount amortization = $975,000.
Why not B: This reflects available-for-sale treatment (unrealized gains/losses in OCI), but the facts support held-to-maturity classification, so temporary fair value changes are not recorded in OCI for HTM debt securities.
Why not C: That would reflect trading or fair-value-through-net-income treatment. Because the investment is held-to-maturity, unrealized fair value changes are not recognized in earnings absent credit impairment.
Why not D: While fair value declines are not recognized for held-to-maturity debt securities (absent credit loss), the carrying amount must include discount amortization. The correct carrying amount is $970,000 + $5,000 amortization = $975,000.
Question 3
Hint
Focus first on the type of security, then on the measurement basis required by its classification under current GAAP.
Answer C. Held-to-maturity debt securities are reported at amortized cost under U.S. GAAP when the investor has both the positive intent and the ability to hold the security to maturity. Other categories, equity securities with readily determinable fair values, available-for-sale debt securities, and investments measured under the fair value option, are measured at fair value rather than amortized cost.
Why not A: This distractor tempts test takers who recall that some investments are not amortized. However, equity securities with readily determinable fair values are measured at fair value with changes recognized in net income (ASC 321) when the investor does not use consolidation or the equity method, so they are not reported at amortized cost.
Why not B: Although this is a debt security, available-for-sale debt securities are reported at fair value on the balance sheet, with unrealized gains and losses generally recorded in OCI (not amortized cost). Therefore they are not measured at amortized cost.
Why not D: Even if an equity security lacks a readily determinable fair value by default, electing the fair value option means the investment is measured at fair value. The fair value election overrides cost-based measurement, so amortized cost does not apply.
Question 4
Hint
Break the item into two decisions: (1) what amount becomes the carrying amount on the transfer date, and (2) how is any unrealized gain or loss already in AOCI handled after the transfer?
Answer A. Under U.S. GAAP for transfers from AFS to HTM (ASC 320), the security is measured at fair value on the transfer date, and that amount becomes the HTM carrying amount. An unrealized gain or loss that was recognized in AOCI while the security was AFS is not immediately recognized in earnings upon transfer; it remains in AOCI and is amortized into interest income over the remaining life as a yield adjustment. Because the decline here is attributable to market interest rate changes (not credit), there is no immediate credit-loss recognition.
Why not B: This option correctly uses the transfer-date fair value but incorrectly flushes AOCI through earnings. For an AFS→HTM transfer the unrealized gain or loss in AOCI is not reclassified to earnings immediately; it remains in AOCI and is amortized into interest income over the remaining life.
Why not C: This choice lures candidates who recall that HTM securities are carried at amortized cost and who think previous AOCI can simply be 'frozen.' It is wrong because the transfer uses fair value at the transfer date to set the new HTM carrying amount, and the existing AOCI amount is generally amortized into interest income rather than being deferred with no yield effect.
Why not D: This distractor gets the measurement right but misstates the amortization method. The amortization of the AOCI amount is recognized in interest income as a yield adjustment; it is not recorded by simply reducing the HTM carrying amount separate from the yield-based amortization process.
Question 5
Hint
First determine classification (HTM vs AFS vs trading), then ask whether the fair-value decline stems from credit deterioration or from market-rate changes.
Answer A. Because Rho has the positive intent and ability to hold to maturity, the bonds are held-to-maturity and measured at amortized cost (ASC 320). A fair-value decline caused by market interest rate movements is not recognized for HTM securities; only expected credit losses are recognized under ASC 326, and the facts state no credit loss is expected.
Why not B: Tempting because AFS securities report unrealized market-driven losses in OCI, but incorrect here because Rho has positive intent and ability to hold to maturity, HTM securities stay at amortized cost unless intent changes (ASC 320).
Why not C: This appeals to candidates who confuse trading/fair-value-election treatment with HTM. Trading (or a fair-value election) would put changes in earnings, but the stem disallows a fair-value election and classifies the bonds as HTM, so earnings recognition is inappropriate.
Why not D: CECL (ASC 326) requires an allowance for expected credit losses on amortized-cost debt, but the allowance reflects expected credit losses, not the entire fair-value shortfall. The stem explicitly states no credit loss is expected, so no allowance is recorded.
Question 6
Hint
Focus first on the investment classification given in the stem, then match that classification to its balance sheet measurement basis.
Answer A. Held-to-maturity debt securities are reported at amortized cost, not at fair value. Because the bond was purchased at par and there is no credit loss allowance, its carrying amount remains $100,000; interest-rate-driven fair value declines are not recognized for HTM securities.
Why not B: This matches available-for-sale (AFS) debt treatment (fair value changes through OCI), which is tempting, but the stem specifies held-to-maturity classification so AFS rules do not apply.
Why not C: This would describe trading debt securities (or certain fair-value-through-profit-or-loss instruments), which are remeasured through earnings. Held-to-maturity securities are not remeasured for market-rate changes to net income.
Why not D: Lower-of-cost-or-market is an outdated or limited shortcut not applicable to held-to-maturity debt under current U.S. GAAP; the correct basis here is amortized cost.
Common questions
Do HTM securities ever affect OCI?
No. HTM securities are carried at amortized cost. If a security is transferred from AFS to HTM, the existing AOCI balance remains and is amortized into interest income as a yield adjustment.
How is credit risk recognized for HTM under CECL?
Record an allowance for expected credit losses that reduces the carrying amount. Changes in the allowance go to earnings. Do not remeasure HTM to fair value for credit risk.
What amount is reported for HTM at year-end?
Report amortized cost net of any CECL allowance. Fair value is not used for measurement. Accrued interest is presented separately from the investment balance.
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