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Straight - Over the term of the bonds the balance in...

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Straight-Line Amortization Amortizing Bond Discount To follow the matching principle, companies allocate bond discount to expense in each period in which the bonds are outstanding. The straight-line method of amortization allocates the same amount to interest expense in each interest period. The calculation is presented in Illustration 10A-1 . Formula for straight-line method of bond discount amortization In the Candlestick Inc. example, the company sold \$100,000, five-year, 10% bonds on January 1, 2010, for \$98,000. This resulted in a \$2,000 bond discount (\$100,000 - \$98,000). The bond discount amortization is \$400 (\$2,000 ÷ 5) for each of the five amortization periods. Candlestick records the first accrual of bond interest and the amortization of bond discount on December 31 as follows. Bond Interest Expense Discount on Bonds Payable Bond Interest Payable (To record accrued bond interest and amortization of bond

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Unformatted text preview: Over the term of the bonds, the balance in Discount on Bonds Payable will decrease annually by the same amount until it has a zero balance at the maturity date of the bonds. Thus, the carrying value of the bonds at maturity will be equal to the face value of the bonds. Alternative Terminology The amount in the Discount on Bonds Payable account is often referred to as Unamortized Discount on Bonds Payable . Preparing a bond discount amortization schedule, as shown in Illustration 10A-2 , is useful to determine interest expense, discount amortization, and the carrying value of the bond. As indicated, the interest expense recorded each period is \$10,400. Also note that the carrying value of the bond increases \$400 each period until it reaches its face value of \$100,000 at the end of period 5. Illustration 10A- Bond discount amortization schedule...
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