GnuCash: how to enter the purchase of a corporate bond with accrued interest

[Alice Lee]

Bond premium and bond discount are recorded and amortized when the bond is
bought for more or less than the face value of the bond.  In other words,
the bond is worth more or less because of the current market interest rate
or the stability of the entity that issued the bond.  It is not the purchase
of a bond with accrued interest receivable.  Two different animals!

-----Original Message-----
From: gnucash-user
[mailto:gnucash-user-bounces+alee212007=satx.rr.com at gnucash.org] On Behalf
Of Larry Evans
Sent: Friday, March 6, 2015 10:19 AM
To: gnucash-user at lists.gnucash.org
Subject: Re: GnuCash: how to enter the purchase of a corporate bond with
accrued interest

On 03/06/2015 09:51 AM, Larry Evans wrote:
> On 03/06/2015 09:02 AM, Mike or Penny Novack wrote:
>> Thank you. I had earlier discussed the issue in terms of "discount", 
>> but you are correct, this would be a "premium" situation. But similar 
>> in that NOT a capital gain or loss but interest INCOME being affected 
>> (the bond premium is like  negative interest income, that is, a debit 
>> instead of a credit).
>>
>> Michael
>>
>>> FWIW - this is what John M Hoffman & Associates CPAs has to say 
>>> about the subject.  nvsoar ____________________________
>>>
>>> /What is accrued interest purchased and what is the tax 
>>> implication?/
>>>
>>>    Most bonds pay interest every six months. This is the coupon date.
>>>    Let's say that you purchase a $10,000 bond paying 6% interest that
>>>    will mature on September 30, 2015. Every March 31 and September 30
>>>    until (and including) September 30, 2015 the bond issuer pays
>>>    interest at the stated rate of the bond (the coupon rate). In this
>>>    case that amount is $300 (6% times $10,000 for one half a year).
>>>
>>>    If you buy that bond on September 15, you will be the one that gets
>>>    that full coupon payment representing six months of interest on
>>>    September 30. Sounds like a great deal. Not so fast. Not that it is
>>>    a good deal or a bad deal but what occurs is a fair deal. When you
>>>    buy that bond, you will pay the seller the interest from the
>>>    previous coupon date through the purchase date. In this case
>>>    essentially 5 and 1/2 months of interest.
>>>
>>>    This amount that you pay is the accrued interest purchased. In this
>>>    case that amount would be approximately $250. In a perfectly simple
>>>    world, you would pay $10,250 to acquire the bond, $250 of that being
>>>    for the accrued interest.
>>>
>>>    On September 30, you receive a coupon payment for $300. This $300
>>>    payment is reported as interest income to you. At tax time we will
>>>    want to report the $250 of accrued interest purchased as an offset
>>>    to your $300 of interest income, essentially netting out to the $50
>>>    that you actually received.
>>>
>>>    In the subsequent year things will be very simple, two coupon
>>>    payments of $300 each and the resulting $600 being the interest
>>>    received and taxable for that year.
> 
> When the bond is redeemed, I get $10,000.  Is the cost basis
> $10,000 or $10,000+accrued_interest = $10,250?
> 

One reason I'm asking this question is because of this passage:

   If you bought 100 shares of ABC Corporation at $70 a
   share and paid your broker an $8.95 commission on the
   transaction, your cost basis for those 100 shares is
   $7,008.95.

from:

  http://www.irs.gov/publications/p550/ch01.html#en_US_2014_publink10009960

But, it seems that it should be either:
  1) deduct the accrued interest from interest income
OR:
  2) add accrued interest to cost basis
but not both because doing both just feels like getting double credit for
the accrued interest deduction.

-regards,
Larry
>>>    ________________
>>>
>>>
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>>
> 
> 
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