Consequently over the life of the bond its carrying

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Unformatted text preview: issued at a discount, such as Bond C, the carrying value on the date the bond is issued is less than its face value. Consequently, over the life of the bond, its carrying value must increase as the discount is amortized. Remember that a discount on a bond is deducted from the bond's face value to determine the carrying value. Thus, any reduction in the discount balance, such as when the discount is being amortized, will decrease the amount being deducted from the face value which thereby increases the carrying value of the bond. The carrying value of Bond C will, therefore, increase over its life. Alternatively, the carrying value of Bond B will decrease over its life. For bonds issued at a premium, such as Bond B, the carrying value on the date the bond is issued is greater than its face value. Consequently, over the life of the bond, its carrying value must decrease as the premium is amortized. Remember that a premium on a bond is added to the bond's face value to determine the carrying value. Thus, any reduction in the premium balance, such as when the premium is being amortized, will decrease the amount being added to the face value which thereby decreases the carrying value of the bond. Thus, the carrying value of Bond B will decrease over its life. c. Interest expense is computed as the bond's book value at the beginning of the accounting period times the effective interest rate per period. Since accountants use the effective interest rate on the date a bond is issued to calculate interest expense, the effective interest rate is constant over the bond's life. This implies that the only factor that could affect whether the interest expense recognized each period increases, decreases, or remains constant over the life of the bond is the book value. As discussed in part (b), the book value of Bond A will remain constant over the life of the bond issue. Consequently, the interest expense recognized in each accounting period will remain constant over the life of Bond A. Alternatively, the interest expense recognized for Bonds B and C will vary across periods. Since the book value of Bond...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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