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Posted by R. C. White on December 27, 2007, 10:34 pm
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Hi, Steve.
> Although you've said to defer recording the interest until cashed,
> that distorts the picture of net worth through the years.
Good catch! You are right, of course. Since Andrew was asking about the
redemption transaction and apparently had not reported interest income
during prior years, I focused on that redemption. My comments are correct
for federal income tax purposes, but not for annual accounting purposes.
Of course, Quicken was not designed as an accounting program, really, but
only as a checkbook program - and then it "just growed". ;^}
When faced with bonds subject to OID (Original Issue Discount), as with
several other kinds of assets, we have to choose whether to have Quicken
reflect economic reality, or go by tax rules. Either way, we also have to
keep supplemental records for the other method if we want to have our cake
and eat it, too.
If we wanted to reflect economic reality and GAAP (Generally Accepted
Accounting Principles), we would need to graft a lot of accounting rules
onto Quicken's simple checkbook design.
For these US Savings Bonds, we would need to make an entry at least once a
year as of December 31. In that entry, we would debit Savings Bond (asset)
and credit Interest Income for the amount by which the bond value increased
during that year. That would correct our income account for the year, and
correctly value our bond asset at the end of the year.
But if we elected to defer the tax on that interest until redemption, we
would have to keep that annual interest increment from being included in
"gross income" for tax purposes. And, in the year of redemption, we would
need to be sure that we included all the interest on redeemed bonds, not
just the current year's increment. We would need some sort of supplemental
record to reconcile our recorded income with what we report on the tax
return.
> I'm new to Quicken and I have not yet answered this for myself. As a
> user of MS$, i have accrued interest as it's earned on the investment
> account Savings Bonds and carried it all as "cash", both the cost/
> purchase and earnings which were accounted as tax-free. When the
> bonds ARE cashed in, I create two transactions. I remove the proceeds
> from Savings Bonds (uncategroized) and create a deposit to the
> receiving account properly accounting for the interest and return of
> capital. That kept net worth and Tax projections accurate.
I'm not sure that I follow this at all! The annual interest income is an
asset, but it is not cash until the bond is redeemed. It should be added to
the bond account itself, as I said above, or be entered into a separate
asset account, such as Accrued Interest Receivable, if you want to see that
amount separately. Either way would be fine with me.
Whether cash received at redemption is a "sale" or a "return of capital" may
be only a matter of semantics, but to me, it clearly is a sale. A return of
capital leaves us holding the asset from which the capital was returned.
But redemption of a bond means surrendering the bond, so we no longer hold
the asset. If we could somehow redeem only a part of the bond's value while
still holding the bond itself, I might agree with the return of capital
characterization. This is what happens when a corporation downsizes and
returns a part of its capital to its shareholders, who continue to hold
their shares, for instance.
> I'm in a bit of quandary as to how to proceed with setup.
As I told Andrew, set up the cost of the bond as an asset when it is
purchased. Then, as you reminded me, annually record the year's interest
increment as income and add it to the bond account (or to a separate asset
account). If you elect to defer reporting the income until redemption, then
keep supplemental records so that it will not be reported as taxable income
until the proper year. When the bond is redeemed, first record interest to
the date of redemption, then record the sale of the bond including the
accumulated interest - with no gain on the sale.
Thanks for the catch, Steve.
RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Currently running Quicken 2008 Deluxe in Vista Ultimate x64)
>> Hi, Andrew.
>>
>> What happened in the real world?
>>
>> You bought bonds and recorded their purchase price in your Bonds account,
>> right? Then you cashed them for more than you paid for them. And you
>> put
>> all the cash into your CU.
>>
>> First, record all the accumulated interest to date of redemption. In
>> accountant-speak: Debit Bonds; Credit Interest Income. This should
>> bring
>> the Bonds account balance up to the redemption value of the Bonds.
>>
>> Second, record redemption of the bonds: Debit Cash; Credit Bonds. Don't
>> worry about principal vs. income at this point; that has already been
>> taken
>> care of by the previous entry.
>>
>> Third, record deposit of the redemption check into your CU: Debit CU;
>> Credit Cash. The CU couldn't care less if the cash is from principal or
>> interest - or from your wages or gambling winnings or anything else.
>>
>> Ending balances:
>> Bonds: Zero
>> Cash: Zero
>> CU: Previous balance plus redemption proceeds
>> "_Int Inc:US Savings Bonds" Category: All the accumulated interest.
>> The
>> interest income is fully taxable on the US Income Tax return, but is
>> entirely exempt from state and local taxation.
>>
>> I've never owned a US Savings Bond, Andrew. Some of my clients did, but
>> that was at least a couple of decades ago. Rules may have changed in
>> that
>> time, and my memory may be fuzzy, too. Anyone "reading over our
>> shoulders"
>> should be aware that there are several series of US Savings Bonds (E, EE,
>> H - and others) and each series has its own rates and methods for paying
>> interest. Some pay the interest in periodic checks, much like most other
>> bonds. Others (such as Series E/EE) are bought at a discount and mature
>> at
>> the face amount; the taxpayer may elect at the first year-end after
>> purchase
>> of the bond to report the accumulated interest annually, but most
>> taxpayers
>> choose to wait and report it all at redemption - which you apparently
>> did.
>> My comments are limited to my understanding of your specific situation
>> and
>> may not apply to others.
>>
>> Be sure to check with your own CPA to validate my comments.
>>
>> RC
>>
>>
>>
>> > OK = here's the deal.
>>
>> > Got an asset account called 'US Savings Bonds'. I update the balance
>> > as
>> > it is reported by US Savings Bond Wizard WITHOUT regard to principal or
>> > interest components.
>>
>> > Got a bank account called 'Credit Union Savings'.
>>
>> > Cashed a bunch of them in today. Want the interest accrued to go into
>> > the
>> > tax category "_Int Inc:US Savings Bonds" so that it gets reported on
>> > t/y
>> > 2007.
>> > But want the entire amount of redemption (principal + interest) to be
>> > TRANSFERED out of the 'US Savings Bonds' account to 'Credit Union
>> > Savings
>> > Account'.
>>
>> > Therefore, can't use BOTH catagories and account name in the transfer,
>> > I
>> > believe, right?
>>
>> > So how does one accomplish this correctly in Q to make BOTH the
>> > transfer
>> > as well as the correct principal/interest associations (I know the two
>> > components based on what the wizard told me which matched the payout
>> > from
>> > the CU perfectly.)
>>
>> > (PS: The wrong answer is to enter interest as it accrues I think since
>> > it
>> > is only REPORTED on the tax return for the year in which you make the
>> > redemption unlike OID interest.....)
>>
>> > Ideas R.C. (or anyone else?)
>>
>> > --
>> > -------------------------------------------------------------
>> > Regards -
>>
>> > - Andrew
>
> Although you've said to defer recording the interest until cashed,
> that distorts the picture of net worth through the years. Since some
> bonds MAY be reasonably held for 30 years and some people have
> significant holdings in Savings bonds, that seems to be a valid but
> incorrect way to handle. My Dad, for whom I run his finances, has
> bonds old enough to no longer pay any interest and they are cashed in
> wgen they hit that point.
>
> I'm new to Quicken and I have not yet answered this for myself. As a
> user of MS$, i have accrued interest as it's earned on the investment
> account Savings Bonds and carried it all as "cash", both the cost/
> purchase and earnings which were accounted as tax-free. When the
> bonds ARE cashed in, I create two transactions. I remove the proceeds
> from Savings Bonds (uncategroized) and create a deposit to the
> receiving account properly accounting for the interest and return of
> capital. That kept net worth and Tax projections accurate.
>
> Since Quicken is using Cash Flows, I don't believe this method will
> provide an acceptable picture, but since I'm still establishing
> accounts, I haven't yet setup these EE/E Bonds. I sense the same
> problem as I encountered in MS$, you can't categorize a transfer
> transaction differently on the two sides (accounts) of the transfer.
>
> I'm in a bit of quandary as to how to proceed with setup.
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