[jessanqi]

hi, some of the yaeger answers said bond issue cost is no longer treated as deferred charges, instead it reduces bond payable liability (similar to a discount).
I’m wondering regarding to such questions, is the answer correct? do We need to consider the amortization of the bond issue cost and does it affect the CV of the bond??
this is really confusing, hope can get some help 🙂

Please advise & Thank you!!

On January 1, 2015, Jaffe Corporation issued at 95, five hundred of its 9%, $1,000 bonds. Interest is payable semiannually on July 1, and January 1, and the bonds mature on January 1, 2025. Jaffe paid bond issue costs of $20,000 which are appropriately recorded as a deferred charge. Jaffe uses the straight-line method of amortizing bond discount and bond issue costs. On Jaffe’s December 31, 2015, balance sheet, the bonds payable should be reported at their carrying value of

A. $459,500
B. $477,500
C. $495,500
D. $522,500

Explanation
The correct answer is B. Bond issue costs should be classified as a deferred charge, rather than being an element of bond discount. Therefore, the carrying value of the bonds will not be affected by any unamortized balance of bond issue costs. Thus, to determine the carrying value of Jaffe’s bonds at December 31, 2015, we compute the original issue proceeds, and add to this amount the portion of the discount amortized during 2015. Note that in this case the bonds are issued at a discount (they are issued at 95); therefore, the amortization of the bond discount increases the carrying amount of the bonds. Had the bonds been issued at a premium (as, for example, “at 105”), then the amortization of the bond premium would reduce the carrying amount of the bonds. In our situation, we have:
1. Proceeds from issuance of bonds: 500, $1,000 bonds issued at 95
$475,000
2. Amortization of discount: Original amount of discount:

Face amount of bonds $500,000
Proceeds upon issuance $(475,000)
Bond discount $25,000
3. Bond discount amortization period = 10 yrs.

4. Annual amortization: $25,000/ 10 years = $2,500 per year

5. Amortization for 2015
$2,500
6. Carrying amount of bonds, 12/31/15
$477,500

[jeff]

Please post these types of single-topic questions in the FAR study group.

A few here and there are ok, but the front page has been getting filled with them, recently.

Post all the questions you want – just in the study group, please.

Thank you,

jeff

AUD - 79
BEC - 80
FAR - 76
REG - 92

Jeff Elliott, CPA (KS)
NINJA CPA | NINJA CMA | NINJA CPE | Another71

[Author]

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