Craig Anderson Senators Jerseyin Here is your first Forum Thu Dec 07, 2017 9:42 am
by rxz123 • 420 Posts
Keep in mind that any amount paid to the lender in excess of the amount borrowed (i.e. Dion Phaneuf Senators Jersey , face value less any discount or plus any premium) represents interest. Let’s see why. When bonds mature, the face value is repaid to the lender, regardless of whether they were issued at face value, at a premium, or at a discount. For example, when the bonds were issued at par (face value) the amount of cash received when issued was equal to the amount to be repaid at maturity. When the bonds were issued at a premium, the amount of cash received when issued was $103 Derick Brassard Senators Jersey , 000 ($3,000 greater than the face value), but only the face value ($100,000) is repaid at maturity. The $3,000 difference represents an effective reduction of the amount of interest paid to the borrower.
In contrast, when the bonds were issued at a discount, the amount of cash received was $96 Daniel Alfredsson Senators Jersey ,000 ($4,000 less than the face value), but the entire face value ($100,000) must be repaid at maturity. The additional $4,000 effectively represents additional interest. However, the accounting system must allocate this interest among the various accounting periods in which the debt is outstanding. This allocation has two parts: (1) the actual interest payment made to the lender during the period and (2) amortizing any premium or discount on the bond. Although the interest payment made to the lender during the period is always a component of the period’s interest expense, there are two methods for amortizing any premium or discount. In the effective interest rate method Curtis Lazar Senators Jersey , interest expense for the period is always the yield (i.e., effective interest rate) times the carrying (or book) value of the bonds at the beginning of the period.
The second method is the straight line method. In this method equal amounts of premium or discount are amortized to interest expense each period. Although GAAP requires use of the effective interest rate method, the straight-line method may be used if the results are not materially different from the effective interest rate method. Repayment of the principal at maturity is trivial. Recall that the principal amount repaid is equal to the face value. This is also the amount that was originally credited to the note or bond payable. As such, you merely need to debit the note or bond payable and credit the cash. While it is possible for companies to sell an almost unlimited number of different kinds of debt instruments by varying parameters of the contract, we need to discuss three of the most frequently used forms:
• Debt with regular interest payments sold at their face or par value.
• Debt with no interest payments and a single payment of principal at maturity. Because no interest payments are made (i.e., a stated rate of zero percent), this debt is sold for a relatively large discount.
• Debt with regular interest payments sold for more (a premium) or less (a discount) than the face or par value.
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