amortization of bond discount

  • This topic has 8 replies, 5 voices, and was last updated 3 years ago by Anonymous.
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  • #1739103
    Jacqueline
    Participant

    Far question I had in exam,I made up the number, the point is that the interest payments start at the date of issuance.

    Said the $60,000 bond is issued on 1/1/x1, coupon is 10% payable semiannually on 1/1 and 7/1. The maturity date is 1/1/x3. The market rate is 12%. By calculation, the Issuance price of bond is 57050 in 1/1, What is the carrying amount of bond on 12/31/x1.

    Can anyone show me the amortization schedule? How to deal with the first coupon pmt on 1/1. Is it related to amortization of discount? Totally messed up. Thanks a lot!

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    #1739109
    Jacqueline
    Participant

    Sorry, the maturity date should be 12/31/x3, which means the n=6, in order to get the PV=57050

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    #1739142
    CPAmePLS
    Participant

    The cash payment is always going to be 3,000 based on the stated rate and the interest expense will vary based on the carrying amount multiplied by the effective interest rate. The amortization of the discount will be the difference between the two. But since the first payment is on date of issuance, there’s no interest and it’s all principal.

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    #1739244
    Jacqueline
    Participant

    So the amortization of discount for the 1st pmt is 3000? We cannot add the amortization to carry amount right? What's the carrying amount of bond on 12/31 then?

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    #1739265
    Anonymous
    Inactive

    Sounds like you don't really understand bond amortization at all. Even our community college accounting class all knew this.

    The initial carrying amount will either be less than face value (discount), or more than face value (premium), and the goal is to adjust (amortize) the carrying amount until it equals the face value (60,000) upon maturity. It should be really simple once you do one or two examples.

    #1739303
    Jacqueline
    Participant

    Well first, I totally understand amortization of bond. What I am talking about is the pmt of coupon at the issuance date. The bond is issued at discount, the diff between interest expense(carry amount*yield)-coupon pmt would be the amortization of discount. Which would be add into carry amount to get new balance of carrying amount until reaching face value. Since the 1st pmt is not interest expense, how to take it into consideration of amortization of discount. If the entire amount is added to carrying amount or just ignore it. You did not understand my question!!!

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    #1739315
    Recked
    Participant

    I believe you do not amortize any discount on the first payment.

    Memento Mori - Kingston NY CPA & EA (SUNY Albany 2002)

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    #1739334
    Anonymous
    Inactive

    The first payment would be on 7/1 not 1/1, and would include stated interest, not effective (amortized) interest. Sorry if I came off as harsh but this is elementary stuff that all candidates should know.

    #1739496
    Anonymous
    Inactive

    You need to use Excel to build your own amortization table for both discount and premium. AND, if you're really feeling ambitious, you should make two more tables for straight-line amortization (in addition to effective interest.) The amortization amount stays the same for straight-line. ***AND***, you need to know qualitatively and quantitatively how amortization affects such balance sheet accounts as retained earnings and interest payable, and income statement accounts as well.

    Bonds are a tough topic, no doubt about it. But setting up your own examples or using those from textbook/review textbook and plugging the numbers into your amortization table will help you learn it better.

    Don't feel badly if you don't know this stuff well yet. I remember in my intermediate accounting courses, there were quite a few students who just wanted CPA exam credits. They weren't even what I'd call good accountants, they were just ambitious. Some of them scored really badly on the in-class exams too…yet, all they were looking for was a ‘C' in the course and would figure out the stuff on FAR later. Well, good for them. Not real good for the learning process though. BTW, Intermediate Accounting is where most of the testing on FAR is focused. Not many people will tell you that though. I'm patting myself on the back right now. No not really, because that would be really silly and I'm not known for silliness.

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