Bonds Pt. 2

Question 1

What is the bond amortization period?

Answer 1

under U.S. GAAP, the period over which to amortize a bond premium or discount and bond issuance costs is the period that the bonds are outstanding (i.e. from the date the bonds are sold); in general, U.S. GAAP amortization is done over the contractual life of the bond

the straight-line method of amortization results in a constant dollar amount of interest expense each period; this method is not GAAP but is allowed under U.S. GAAP if the results are not materially different from the effective interest method

use of the effective interest method is required by U.S. GAAP; under this method, interest expense is calculated by multiplying the carrying value for the bond at the beginning of the period by the effective interest rate; this method of amortization results in a constant rate of interest each period; the difference between interest expense and the cash paid for interest is the amortization for the period of the discount or premium

Question 2

Bonds issued between interest dates

Answer 2

interest payments on bonds are generally made semiannually; however, bonds are usually sold between interest date, which requires additional entries for accrued interest at the time of sale; the amount of interest that has accrued since the last interest payment is added to the price of the bond; the purchaser pays such interest and is reimbursed at the next payment date on receipt of a full period’s interest

Question 3

Year-end bond interest accrual

Answer 3

when the date of a scheduled interest payment and the issuer’s year-end do not agree, it is necessary to accrue interest by an adjusting entry on the issuer’s books at year-end; the accrual must take into account a prorated share of discount or premium amortization