Bonds and Long-Term Debt
Bond accounting involves recording the issuance, interest expense, amortization of premiums or discounts, and retirement of bonds payable using the effective interest method.
Explanation
When bonds are issued at a premium (above face value) or discount (below face value), the difference is amortized over the life of the bond. The effective interest method multiplies the carrying amount by the market rate to determine interest expense, with the difference between interest expense and cash interest being the amortization of the premium or discount.
Bond issuance costs are netted against the carrying amount of the bond. Early retirement of bonds results in a gain or loss equal to the difference between the carrying amount and the reacquisition price. Convertible bonds require special treatment when converted to equity, and bonds with detachable warrants require allocation of proceeds between the debt and equity components.
Key Points
- •Effective interest method: carrying amount × market rate = interest expense
- •Premium bonds: interest expense < cash interest paid
- •Discount bonds: interest expense > cash interest paid
- •Early retirement gain/loss = carrying amount minus reacquisition price
Exam Tip
Master the effective interest method amortization table. Know how to calculate interest expense, cash payment, and amortization for any period.
Frequently Asked Questions
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