Accounting for Financial Institutions Course code: ACT305 Bank Accounting

Transcription

1 Accounting for Financial Institutions Course code: ACT305 Bank Accounting Lectures 3 and 4 1 Accounting for Investment Securities 2 1

2 There are three types of investment, which are: 1. Government treasury Treasury bills: (one year or less) sold at a discount Discount price = face amount original purchase price Discount is allocated over the life of the bill 3 Treasury notes: (from 1 year and less than 10years). They yield interest usually every 6 month Treasury bonds: (more than 10 years ), interest is paid every 6 months 4 2

3 (2) Bonds (issued by governmental agencies and corporations). (3) Trading and interest-bearing 5 Purchase of security Security transactions Interest earned and subsequently collected in cash The redemption at the maturity date, the bank receives the face amount of security in cash Sale of security before the maturity date 6 3

4 Government treasury bills do not pay interest periodically. The bank earns interest income on treasury bills by purchasing the bills at a discount and holds them until maturity. The difference between the purchase price and the face amount is the discount. 7 First :Purchase of security Securities (bond) may be purchased at: (A) The face amount (purchase price = par value) Government bond Cashier's checks 8 4

5 First :Purchase of security Securities (bond) may be purchased at: (B) At premium (Purchase price> par value ) Government bond Premium Cashier's checks 9 First :Purchase of security Securities (bond) may be purchased at: (C) At discount (purchase price< par value) Government bond Cashier's checks Discount 10 5

6 EX 1: Bank Misr purchased the following on January 1, 2005: (1) A 240,000 L.E Government bonds (face value), 10% coupon interest, maturity date Dec.31, 2017 coupons due on June 30 and Dec, 31. The purchase price is L.E. 240, (1) Egyptian Government bond 240,000 Cashier's checks 240,

7 Bank Misr purchased the following on January 1, 2005: (2) Government bonds, face value at L.E. 300,000, 12% coupon interest, matures Dec.31, 2018, Coupons due on June30 and Dec31. The purchase price is L.E. 320, (2) Egyptian Government bond 300,000 Premium on bonds 20,000 Cashier's checks 320,

8 Bank Misr purchased the following on January 1, 2005: (3) Government bonds, face amount L.E 100,000, 9% coupon, matures Dec. 31, The coupons are due on June 30 and Dec. 31 of each year. The purchase price is L.E 98, (3) Egyptian Government bond 100,000 Cashier's checks 98,000 Discount on bonds 2,

9 Bank Misr purchased the following on January 1, 2005: (4) Egyptian Government treasury bills L.E. 250,000 face amount, to mature on September 30, The purchase price is L.E. 227, (4) Egyptian Government treasury bills - cost 250,000 Cashier's checks 227,500 Discount on treasury bills 22,

10 Second :Interest earned Interest is record monthly. Interest is calculated as follows: Interest = Face value x Annual interest rate x portion of year 19 Second :Interest earned To record interest income on invested Interest receivable Interest income inv

11 EX 2: Bank Misr purchased the following on January 1, 2005: (1) A 240,000 L.E Government bonds (face value), 10% coupon interest, maturity date Dec.31, 2017 coupons due on June 30 and Dec, 31. The purchase price is L.E. 240, (1) Monthly interest = x 10%x 1/12=2000 Interest receivable Inv. Sec. 2,000 Interest income,treasury bonds 2,

12 Bank Misr purchased the following on January 1, 2005: (2) Government bonds, face value at L.E. 300,000, 12% coupon interest, matures Dec.31, 2018, Coupons due on June30 and Dec31. The purchase price is L.E. 320, (2) Monthly interest = x 12%x 1/12=3000 Interest receivable Inv. Sec. 3,000 Interest income,treasury bonds 3,

13 Bank Misr purchased the following on January 1, 2005: (3) Government bonds, face amount L.E 100,000, 9% coupon, matures Dec. 31, The coupons are due on June 30 and Dec. 31 of each year. The purchase price is L.E 98, (3) Monthly interest = x 9%x 1/12=750 Interest receivable Inv. Sec. 750 Interest income,treasury bonds

14 Coupon due date When the bank collects the accrued interest receivable at the payment date on June 30 and Dec. 31, the journal entry would be as follow: ( ) 6 months = L.E 34,500 Cash 34,500 Interest receivable Inv. Sec. 34, Third: Redemption at maturity date On the maturity date, the face value of a treasury bill is redeemed Cash Treasury bills 28 14

15 Bank Misr purchased the following on January 1, 2015: (4) Egyptian Government treasury bills L.E. 250,000 face amount, to mature on September 30, The purchase price is L.E. 227, (4) Redemption at maturity date On the maturity date (30/9/2015), the face value of a treasury bill is redeemed Cash 250,000 Treasury bills 250,

16 Bank Misr purchased the following on January 1, 2005: (2) Government bonds, face value at L.E. 300,000, 12% coupon interest, matures Dec.31, 2018, Coupons due on June30 and Dec31. The purchase price is L.E. 320, (2) Redemption at maturity date On the maturity date (31/12/2018), the face value of the governmental bond is redeemed Cash 300,000 Governmental Bond 300,

17 Fourth: Sale of security before maturity date: When a security is sold before the maturity date, a gain or loss may result. 33 The government bonds in transaction 1 were sold on Nov. 1, 2017 for L.E. 255,000 (plus interest from June 30 till Nov.). Record the journal entry. Selling price = 255,000 + interest for 4 month = 255, = 263,

18 Cash 263,000 Government bonds 240,000 Interest receivable investment 8,000 Securities gains and losses 15, Exercise (1) CIB purchased Treasury bills for 1,850,000 on March 31, 2015 to mature on January 31, 2016, face value of 2,000,000 Required 1) record the purchase of treasury bill on March 31, 2015, payment is made by cashier's checks 2) If the bill was redeemed on January 31, 2016 (on maturity date). Provide the journal entry to record the sale of the treasury bill

19 Date March 31, 2015 Account titles and explanation Debit Government Treasury bills 2,000,000 Credit Discount on Treasury bills 150,000 Cashier's checks 1,850,000 January 31, 2016 Cash 2,000,000 Government Treasury bills 2,000, Exercise (2) CIB purchased a 2,000,000 L.E. governmental bonds (face value) on March 31, 2005 to mature on January 31, Required 1) Record the purchase of the governmental bonds on March 31, 2005, if CIB paid 2,100,000 L.E. and the payment was made by cash. 2) If the governmental bond provides a 10% interest rate and the coupons are paid every June 30 and December 31. What is the adjusting entry to record the earned interest on 30 of April ) Record the entry on 30 of June when the interest is received. 4) If the bond was redeemed on January 31, 2014 (before maturity date). Provide the journal entry to record the sale of the bond. If it was sold for $1,900,000 plus any earned interest

20 Date Account titles Dr Cr March 31, 2005 Government Bonds 2,000,000 Premium on bonds 100,000 Cash 2,100,000 April 30, 2005 Interest receivable 16,667 Interest income- investment (10% x 2M x 1/12) June 30 Cash 50,000 16,667 Interest receivable 50,000 January 31, 2014 Cash 1,916,667 Security gains and losses 100,000 Government Bonds 2,000,000 Interest Receivable 16, End of Lectures 3 and