The systematic allocation of the discount on bonds payable (reported as a debit in a contra-liability account) to Bond Interest Expense over the life of the bonds.
Why do we amortize discounts?
In this way, an amortized bond is used specifically for tax purposes because the amortized bond discount is treated as part of a company’s interest expense on its income statement. The interest expense, a non-operating cost, reduces a company’s earnings before tax (EBT) and, therefore, the amount of its tax burden.
How do you calculate amortization discount?
Divide the total discount or premium by the number of remaining periods in order to determine the amount to amortize in the current period. Multiply the face value of the bond by its stated interest rate to arrive at the interest payment to be made on the bond in the period.
Why do we amortize discount or premium?
Therefore, bond discounts or premiums have the effect of increasing or decreasing the interest expense on the bonds over their life. Under these conditions,it is necessary to amortize the discount or premium over the life of the bonds by using either the straight-line method or the effective interest method.
What is the amortization of discount on bonds payable?
When a discounted bond is sold, the amount of the bond’s discount must be amortized to interest expense over the life of the bond. When using the effective interest method, the debit amount in the discount on bonds payable is moved to the interest account.
What does amortized cost mean?
Amortized cost is that accumulated portion of the recorded cost of a fixed asset that has been charged to expense through either depreciation or amortization. Depreciation is used to ratably reduce the cost of a tangible fixed asset, and amortization is used to ratably reduce the cost of an intangible fixed asset.
What is amortization in a business?
In business, amortization is the practice of writing down the value of an intangible asset, such as a copyright or patent, over its useful life. Amortization expenses can affect a company’s income statement and balance sheet, as well as its tax liability.
What are the two methods of amortizing discount and premium on bonds payable explain each?
If the company uses the amortized cost approach to measure a long-term debt, it can use two methods to amortize the discount and the premium: the effective interest rate method, or. the straight-line method (allowed only under U.S. GAAP).
How do you calculate the amortization of a bond?
Amortization = (Bond Issue Price – Face Value) / Bond Term
Simply divide the $3,000 discount by the number of reporting periods. For an annual reporting of a five-year bond, this would be five. If you calculate it monthly, divide the discount by 60 months. The amortized cost would be $600 per year, or $50 per month.
How do you record a bond at a discount?
Accounting for Bond Amortization
If there was a discount on bonds payable, then the periodic entry is a debit to interest expense and a credit to discount on bonds payable; this has the effect of increasing the overall interest expense recorded by the issuer.
What does it mean to amortize a premium?
If the bond pays taxable interest, the bondholder can choose to amortize the premium—that is, use a part of the premium to reduce the amount of interest income included for taxes.
How are debt issuance costs amortized?
The debt issuance costs should be amortized over the period of the bond using the straight-line method. That makes the annual expense equal over the term of the bond.
What does no amortization mean?
A non-amortizing loan has no amortization schedule because the principal is paid off in a single lump sum. … Non-amortizing loans require their principal to be paid back in one lump sum rather than through regular installments and usually feature a short duration and a high-interest rate.
Why do we amortize bonds?
Bond discount amortization also helps adjust the discounted bond carrying value over time. Because bonds sold at a discount will be repaid at their full face value, total bond discount is added back to arrive at the bond face value.