Question on bonds date, please no biting my head off if it is an easy one, ty!;)

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  • #187525
    AnaTG
    Participant

    Well, I know and admit this is a dang easy question however my brain is fried and I am confused because of one detail in the F-5 bond lecture from Becker…so without further adieu here we go:

    On the topic “Methods of discount and premium amortization”, page F5-38 from the 2013 FAR lecture it says that “Under US GAAP, the period over which to amortize a bond premium or discount is the time period that the bonds are outstanding (i.e., from the date the bonds are sold). In general, US GAAP amortization is done over the contractual life of the bond. AND the lecture continues with the following example: “A 5-Year bond dated JAN 1st does not actually sell until NOV 1st. In this case, the period of amortization is 50 months (not 60 months)”.

    So fine, I completely understand this, however, isn’t the example bellow for Dixon Co. regarding the same topic as the example above? Why isn’t the total months to be divided by $3,300 actually 52 (4 months of Year 1 + the 48 months of Y2 through Y5?) instead of 55? Here is the homework example:

    “Dixon Co. incurred costs of $3,300 when it issued, on August 31, Year 1, 5-year debenture bonds dated April 1, Year 1. What amount of bond issue expense should Dixon report in its income statement for the year ended December 31, Year 1 under U.S. GAAP?

    a. $3,300

    b. $495

    c. $240

    d. $220

    Explanation: Choice “c” is correct. $240 bond issue expense for the year ended December 31, Year 1.

    Issue costs $ 3,300

    Months to maturity [60-5 (Apr. 1 to Aug. 31)] = ÷ 55

    Per month 60

    Months outstanding (Sept. 1 to Dec. 31) × 4

    4 months’ expense $ 240″

    Any help is greatly appreciated!

    Ana T.

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  • #585984
    mla1169
    Participant

    It's exactly the same . You're figuring 48 months after year 1, (you said 4 + 48) but there's actually 51 months after year 1 because the issue date was April 1, not January 1.

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    #585985
    M.O.D.
    Member

    The bond is outstanding 55 months because it is dated April 1, year 1 and expires April 1, year 6. Total is 5×12= 60 months.

    However, it is not outstanding until August 31 (when it is issued) , which is a period from April 1 to August 31 = 5 months.

    So 60-5 = 55

    Alternatively

    4 months year 1 + 48 (4 years) + 3 months (until April 1 of the last year) =55

    It took me a while to figure it out in Gleim. I have to draw a calendar and count months…

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    #585986
    AnaTG
    Participant

    Well, call me stupid, which at this point I am, but I was using August 31, Year 1, the date of the issuance/sale of the bonds as the starting point for the 5-years count down (w/ expiration date being August 31, year 6) so I got my 60 months. *Sigh, hitting head on wall*.

    Thank you so very much!!!

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