CAPITULO 14 INTERMEDIA - Chapter 14 Non-Current Liabilities...

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CHAPTER 14 NON-CURRENT LIABILITIES This IFRS Supplement provides expanded discussions of accounting guidance under International Financial Reporting Standards (IFRS) for the topics in Intermediate Accounting. The discussions are organized according to the chapters in Intermediate Accounting (13 th or 14 th Editions) and therefore can be used to supplement the U.S. GAAP requirements as presented in the textbook. Assignment material is provided for each supplement chapter, which can be used to assess and reinforce student under- standing of IFRS. EFFECTIVE-INTEREST METHOD As discussed earlier, by paying more or less at issuance, investors earn a rate different than the coupon rate on the bond. Recall that the issuing company pays the contractual interest rate over the term of the bonds but also must pay the face value at maturity. If the bond is issued at a discount, the amount paid at maturity is more than the issue amount. If issued at a premium, the company pays less at maturity relative to the issue price. The company records this adjustment to the cost as bond interest expense over the life of the bonds through a process called amortization . Amortization of a discount increases bond interest expense. Amortization of a premium decreases bond interest expense. The required procedure for amortization of a discount or premium is the effective- interest method (also called present value amortization ). Under the effective-interest method, companies: [1] 1. Compute bond interest expense first by multiplying the carrying value (book value) of the bonds at the beginning of the period by the effective-interest rate. 1 2. Determine the bond discount or premium amortization next by comparing the bond interest expense with the interest (cash) to be paid. Illustration 14-1 depicts graphically the computation of the amortization. Amortization Amount Carrying Value of Bonds at Beginning of Period Effective- Interest Rate Bond Interest Expense Face Amount of Bonds Stated Interest Rate Bond Interest Paid = ILLUSTRATION 14-1 Bond Discount and Premium Amortization Computation 1 The carrying value is the face amount minus any unamortized discount or plus any unamortized premium. The term carrying value is synonymous with book value . 2 The issuance of bonds involves engraving and printing costs, legal and accounting fees, commissions, promotion costs, and other similar charges. These costs should be recorded as a reduction to the issue amount of the bond payable and then amortized into expense over the life of the bond, through an adjustment to the effective-interest rate. [2] For example, if the face value of the bond is $100,000 and issue costs are $1,000, then the bond payable (net of the bond issue costs) is recorded at $99,000. Thus, the effective-interest rate will be higher, based on the reduced carrying value.
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This note was uploaded on 02/02/2012 for the course ACCO 3350 taught by Professor Alvarez during the Spring '11 term at American International.

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CAPITULO 14 INTERMEDIA - Chapter 14 Non-Current Liabilities...

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