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7252569-MIdterm-1 (dragged) 27 - under straight-line and...

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Kieso, Weygandt, Warfield, Young, Wiecek Intermediate Accounting, Eighth Canadian Edition 14-11 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. The amortization period is the period of time that the bonds are outstanding. e. 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. 4. 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 discount or premium amortization
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Unformatted text preview: 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....
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