# To the income statement via amortization as an

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to the income statement via amortization, as an increase to interest expense, For a premium the premium is a benefit the issuer receives at issuance, Amortization of the premium red interest expense over the bond's life. In both cases, interest expense on the income state represents the effective cost of debt (the nominal cost of debt is the cash interest paid). Companies amortize discounts and premiums using the effective interest method. To . trate, assume that Verizon issues bonds with a face amount of \$600,000, a 3% annual coupon payable semiannually (1.5% semiannual rate), a maturity of three years (six semiannual pay periods), and a market (yield) rate of 4% annual (2% semiannual). These facts yield a bond i price of \$583,195,71, which we round to \$583,196 for the bond discount amortization table Exhibit 7,3,

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Module 7 I Liability Recognition and Nonowner Financing 7-18 - ~~-- =»iIBIT 7.3 Bond Discount Amortization Table [A] [8] [C] [0] [E] ([E) x market%) (Face x coupon%) ([A) - [BJ) (Prior bat - [C}) (Face - [D}) Interest Cash Discount Discount Bond Expense Interest Paid Amortization Balance Payable, Net \$16,804 \$583,196 \$11,664 \$ 9,000 \$2,664 14,140 585,860 11,717 9,000 2,717 11,423 588,577 11,772 9,000 2,772 8,651 591,349 11,827 9,000 2,827 5,824 594,176 11,884 9,000 2,884 2,940 597,060 11,940 9,000 2,940 0 600,000 --- --- II-- ~ \$70,804 \$54,000 \$16,804 During the bond life, carrying value is adjusted to par and the discount to zero --------;C=====~L=====K===============_~ Cash paid Q\.!J§. discount amortization equals interest expense [A] [B] [C] [0] [E] ([E) x market%) (Face x coupon%) ([B) - [A}) (Prior bat - [C}) (Face + [D}) Interest Cash Premium Premium Bond Expense Interest Paid Amortization Balance Payable, Net 0 \$17,386 \$617,386 1 \$ 6,174 \$ 9,000 \$ 2,826 14,560 614,560 2 6,146 9,000 2,854 11,706 611,706 3 6,117 9,000 2,883 8,823 608,823 4 6,088 9,000 2,912 5,911 605,911 5 6,059 9,000 2,941 2,970 602,970 During the bond 6 6,030 9,000 2,970 0 600,000 life, carrying value is --- --- --- adjusted to par and \$36,614 \$54,000 \$17,386 the premium to zero Cash paid less premium amortization equals interest expense interest period is denoted in the left-most column. Period 0 is the point at which the bond is .and period I and following are successive six-month periods (recall, interest ispaid semian- ~) Column [A] is interest expense, which is reported in the income statement. Interest expense puted as the bond's net balance sheet value (the carrying amount of the bond) at the begin- ~ of the period (column [ED multiplied by the 2% semiannual rate used to compute the bond price. Column [B] is cash interest paid, which is a constant \$9,000 per the bond contract (face t X coupon rate). Column [C] is discount amortization, which is the difference between t expense and cash interest paid. Column [D] is the discount balance, which is the previous e of the discount less the discount amortization in column [C]. Column [E] is the net bond Ie,which is the \$600,000 face amount less the unamortized discount from column [D]. The table shows amounts for the six interest payment periods. The amortization process con- until period 6, at which time the discount balance is 0 and the net bond payable is \$600,000 maturity value). Each semiannual period, interest expense isrecorded at 2%, the market rate of t at the bond's issuance. This rate does not change over the life of the bond, even if the pre- g market interest rates change. An amortization table reveals the financial statement effects bond for its duration. Specifically, we see the income statement effects in column [A], the
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