Weygandt, Kieso, Warfield, Young, Wiecek
Intermediate Accounting, Eighth Canadian Edition
TEACHING TIP
Illustration 14-1 can be used to demonstrate how bond prices are affected by the stated
rate of interest. A numerical example is given that calculates the selling price of bonds
issued at a premium, at par, and at a discount.
d.
e.
4.
The amortization period is the period of time that the bonds are outstanding.
On the balance sheet the bonds are shown net of any premium or discount,
though for bookkeeping purposes a bond discount or bond premium account
can be used.
The effective interest method must be used to calculate the periodic interest expense
if GAAP is a constraint. The carrying amount of the bonds at the start of the period
is multiplied by the effective interest rate. If GAAP is not a constraint, or for
illustration purposes, the straight-line method is often used because of its simplicity.
TEACHING TIP
Illustration 14-2 compares the calculation of bond or discount premium amortization
under straight-line and effective interest methods.
Effective Interest Method. In teaching this part of the chapter the following
relationships may be emphasized:
a.
Carrying Value of Bonds = Face Value Plus Premium or Less Discount
b.
Interest Expense = Market Interest Rate x Carrying Value of Bonds
c.
Interest Payable = Stated Interest Rate x Face Value of Bonds
d.
If a premium exists: Interest expense will be less than interest paid or payable.
e.
If a discount exists: Interest expense will be greater than interest paid or
payable.
f.
Difference between interest expense and interest paid or payable is the
amount of amortization of the discount or premium.
5.
Review accounting for bonds issued between interest dates
6.
Issuance expenses may be treated as an immediate expense or as a reduction of the
related liability and amortized. Treatment as a deferred charge is no longer an
acceptable method under GAAP.
14-11