Bonds selling at 98 are t rading at a 2 disc ount and

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Unformatted text preview: e value or $1,000. Bonds selling at 98 are t rading at a 2% disc ount and c an be purc hased f or 98% of f ac e value or $980. Bonds selling at 103 are t rading at a 3% premium and c an be purc hased at 103% of f ac e value or $1,030. Premiums and disc ount s are amort ized over t he lif e of t he bonds in order t hat t he liabilit y is adjust ed t o t he f ac e amount by t he dat e on whic h t he bonds mat ure. Bond int erest expense is inc reased by amort izat ion of a disc ount and dec reased by amort izat ion of a premium, IF RS requires t he ef f ec t ive int erest met hod; however, GAAP allows a c hoic e and of t en smaller privat e ent it ies t o use t he st raight - line met hod. T he c onc ept of amort izat ion of premium and disc ount are illust rat ed on pages 913–922 using bot h t he met hods. Bond Pric ing: Issuing Bonds bet ween Int erest Dat es When bonds are issued (sold) on a dat e ot her t han an int erest dat e, t he purc haser, by c onvent ion, st ill rec eives t he f ull int erest payment at t he next payment dat e. T he purc haser is required, however, t o c ompensat e t he seller f or t he port ion of t he int erest payment t hat t hey are not ent it led t o. T he purc haser does t his by paying t he issuer t he agreed- upon purc hase pric e plus an amount equal t o t he int erest earned on t he bonds sinc e t he last int erest payment dat e. F or example, assume a 10- year bond wit h a f ac e amount of $300,000 is issued. T he bond issue https://blackboar w/lc5122001.tp0/cobaltM ainFr ame.dowebct 4/9 9/10/13 Blackboar d Lear ning System has a st at ed rat e of 9% payable semi- annually. T he bond issue is dat ed January 1, 2011. If t he bonds were issued at par on Marc h 1, 2011, t he issuer would make t he f ollowing journal ent ry: T he July 1, 2011 journal ent ry f or t he semi- annual int erest payment would be: Net bond int erest expense f or t he six- mont h period is $9,000 ($13,500 – $4,500), whic h represent s t he int erest expense f or t he f our- mont h period t he bonds were ac t ually out st anding ($300,000 x .09 x 4/12). Premiums and disc ount s are amort ized over t he period of t ime t hat t he bonds are ac t ually out st anding. T his means t hat premiums and disc ount s are amort ized f rom t heir dat e of sale, not t he original dat e of t he bonds. F or t he prec eding example, if t here was a premium or disc ount , it would be amort ized over 118 mont hs (10 years x 12 mont hs – 2 mont hs), not 120 mont hs or 10 years. Sinc e t he bonds were not out st anding f or January and F ebruary, any premium or disc ount c ould not be amort ized over t hose t wo mont hs. Ext inguishment of Debt (Derec ognit ion of Debt ) Having looked at how we ac c ount f or t he issuanc e of bonds, we should now c onsider what ent ries are required t o rec ord t heir ret irement (repayment ). Review pages 923–924 and Illust rat ion 14- 10, “Derec ognit ion of Debt ,” in your t ext book. Bonds are redeemed eit her at mat...
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This note was uploaded on 02/05/2014 for the course BUS 370 taught by Professor Andreathomas during the Spring '13 term at Capital University.

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