Weygandt, Kieso, Warfield, Young, Wiecek
Intermediate Accounting, Eighth Canadian Edition
Amortization. This schedule provides the information necessary for each semi-annual
entry for interest and discount or premium amortization. The spreadsheet softwares
available from Excel, Lotus or QuattroPro are capable of applying the effective interest
method.
14.
Unamortized premiums/discounts are added/deducted from bonds payable and presented
net in the liability section of the balance sheet. Premiums are added to bonds payable and
discounts are deducted from bonds payable.
15.
If the interest payment date does not coincide with the financial statement date, the
amortized premium or discount should be prorated by the appropriate number of months to
arrive at the proper interest expense.
16.
Some of the costs associated with issuing bonds include engraving and printing costs,
legal and accounting fees, commissions, and promotion expenses. These costs, can be
either recognized in net income or added to the carrying value of the debt and amortized
over the life of the debt in a way that is similar to what is done for bond discounts.
Notes Payable
17.
The difference between current notes payable and long-term notes payable is the maturity
date. Accounting for notes and bonds is quite similar.
18.
Interest-bearing notes are treated the same as bondsa discount or premium is recognized
if the stated is rate different than the effective yield. Zero-interest-bearing notes represent
a discount on the note and the discount is amortized similar to the manner on interestbearing notes.
19.
When a long-term note is issued solely for cash, the interest factor is assumed to be the
stated or coupon rate plus or minus the amortization of the discount or premium. In special
situations where a note is exchanged for cash and some additional privilege, the
difference between the present value of the payable and the amount of cash loaned should
be recorded as a discount on the note and as unearned revenue. This discount should be
amortized by a charge to interest expense over the term of the note using the effective
interest method. The unearned revenue is prorated on the same basis as the privilege that
gave rise to the unearned revenue is realised by the lender/customer. For example, the
privilege may be a favourable merchandise purchase agreement. In this case, the unearned
revenue is prorated on the same basis that each period's sales to the lender/customer bear
to the total sales to that customer for the term of the note.
20.
When a debt instrument is exchanged for non-cash consideration, such as property,
goods, or services, the stated rate of interest is presumed fair unless a) no interest rate is
stated, b) the stated rate is unreasonable, or c) the face amount of the debt is materially
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