Bonds

Question 1

What is the financial impact for amortizing a bond discount using the straight line method versus the effective interest method?

Answer 1

Discount error using straight line method for amortization:
1. Carrying amount = Overstated
2. Interest expense = Overstated
3. Net Income = Understated

Question 2

What is the financial impact for amortizing a bond premium using the straight line method versus the effective interest method?

Answer 2

Premium error using straight line method for amortization:
1. Carrying amount = Understated
2. Interest expense = Understated
3. Net Income = Overstated

Question 3

At the end of the bond term what would be the carrying amount of the bond if the amortizing of a premium or a discount was done using the straight line method instead of the effective interest method?

Answer 3

The carrying amount would be presented at face value as the discount or premium would have been fully amortized.

Question 4

How are Bond issuance costs recorded?

Answer 4

Bond issuance cost are included within the discount or premium of the bond and is amortized using the effective interest method over the term of the bond.

Question 5

When a bond is issued at a discount what is the behavior of the interest expense over time?

Answer 5

At the beginning interest expense is low, but it will constantly increase over time as it gets closer to the end term of the lease.

Question 6

When a bond is issued at a premium what is the behavior of the interest expense over time?

Answer 6

At the beginning interest expense is high, but it will constantly decrease over time as it gets closer to the end term of the lease.

Question 7

What are the typical issuance cost in a bond?

Answer 7

In general all cost associated with the issuance of bonds.
1. Legal fees
2. Underwriters’ commissions.
3. Engraving and printing
4. Promotions costs