[AlexCPA]

Does anyone have an example of how the new rules apply to Bond Issue Costs? Are they in the updated Ninja Book?

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[jeff]

Yes they are…I have a few slides about it in NINJA BLITZ – if you have NINJA MCQ access currently, you can view it – Bonds & Debt Restructure, Part I

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

[rmm77]

Hey Jeff, I was still confused in the book on what the journal entry would be when you amortize the BIC and include it as part of interest expense. Is that anywhere else in the Ninja materials?

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[jberrier]

Here's an example I came up with.

Let's say a company issues a 20-year $100,000 bond with a stated rate of 5%, interest paid annually. It is issued with a discount of 12,000 for an effective rate of 7%, with bond issue costs of 5,000. So the JE for the issue is:

Dr.
Cash 83,000
Discount 12,000
BIC 5,000

Cr.
Bonds Payable 100,000

So, assuming issue at January 01, the first payment of $5,000 will be compared to interest calculated at the effective rate based on carrying value (C.V. = 100,000 – 12,000 disc. – 5,000 bic = 83,000). So the effective interest will be $5,810. Normally the excess of $810 would be the current discount amortization, but since BIC is now part of this calculation, the 810 needs to be allocated on the relative amount of 17,000 (the discount of 12,000 plus BIC of 5,000). So, the portion allocated to the discount is $572 (12,000/17,000 times 810), and the BIC allocation is $238 (5,000/17,000 times 810).
I think they called this some kind of simplification initiative, but it sure doesn’t seem to simplify it, although I realize this is how it is done under IFRS too.

[rmm77]

So is the JE for when interest paid still the same?

Interest expense 5810
Discount 810
Cash 5000

or is it

Interest expense 5810
Discount 572
BIC 238
Cash 5000

?

FAR-74,92
BEC-85
AUD-8/8
REG-83

[jberrier]

The 12/31 accrual entry would be:

Dr.
Interest Expense 5,810

Cr.
Interest Payable 5,810

The January 01 payment would be:

Dr.
Interest Payable 5,810

Cr.
Discount on Bonds Payable 572
Bond Issue Costs 238
Cash 5,000

[rmm77]

Thanks! And I agree, I dont see how this “simplifies”

FAR-74,92
BEC-85
AUD-8/8
REG-83

[AlexCPA]

Thanks for the example. I agree, the old rules of simply using straight-line to amortize the BIC separately was much easier.

Can you record the 12/31 accrual as

Dr Interest expense 5810
Cr Discount 572
Cr BIC 238
Cr Bond Payable 5000

Then the payment:

Dr Bond Payable 5000
Cr Cash 5000

?

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Using Becker and Ninja MCQ

[AlexCPA]

Here's an example in Ninja MCQ. This involves Balance Sheet presentation of Bond issue Costs. Bond liability is now shown net of both discount and bond issue costs.

On June 30, Huff Corp. issued at 99, 1,000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Huff should report the bond liability at:
A. $955,000.
B. $990,000.
C. $1,000,000.
D. $1,025,000.

The correct answer is A.

Accounting Standards Update (ASU) 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges.

The carrying value of the debt, initially, the bond liability, is $990,000, computed as the number of bonds multiplied by the face amount per bond, multiplied by the issue percentage, reduced by the bond issue costs of $35,000:

1,000 bonds × $1,000 face × 0.99 = $990,000
$990,000 − $35,000 = $955,000

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[jberrier]

Alex, actually your accrual entry above is correct, except that “bonds payable” should be “interest payable” since only interest is being paid. Thanks for the input. After I posted my initial entry for the 12/31 accrual, I knew something felt wrong about it, in that the discount and BIC amortization should have been recorded at 12/31, not the 01/01 payment date. It's kind of strange, but interest expense can be different than the related interest payable, as in this case it is since the payable is based on the stated rate of the bond.

[AlexCPA]

You're right it should be interest payable not, bond payable, my mistake! My head was somewhere else.

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Using Becker and Ninja MCQ

[Author]

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