Which method is used to compute the amortization of bond premium or discount?
Which method is used to compute the amortization of bond premium or discount?
The preferred method for amortizing (or gradually expensing the discount on) a bond is the effective interest rate method. Under this method, the amount of interest expense in a given accounting period correlates with the book value of a bond at the beginning of the accounting period.
Which statement is correct when the effective interest method is used to amortize bond premium or discount?
Which statement is correct when the effective-interest method is used to amortize bond premium or discount? The interest expense increases each period if the bonds were issued at a premium. The carrying amount at the end of the first year would be highest if the bonds were issued at a discount.
When the effective interest method of bond premium amortization is used the?
The effective interest method is an accounting standard used to amortize, or discount a bond. This method is used for bonds sold at a discount, where the amount of the bond discount is amortized to interest expense over the bond’s life.
What are the two methods of amortization of bonds discount premium?
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).
When bonds are issued at a premium and the effective interest method is used for amortization at each subsequent interest payment date the cash paid is?
Question: When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent Interest payment date, the cash paid is: Multiple Choice Less than the interest expense More than if the bonds had been sold at a discount Greater than the interest expense.
When interest expense is calculated using the effective interest amortization method?
Interest expense is calculated as the effective-interest rate times the bond’s carrying value for each period. The amount of amortization is the difference between the cash paid for interest and the calculated amount of bond interest expense.
What is the difference between the effective interest method and the straight line method when amortizing either a discount or a premium?
Straight line amortization is widely considered to be a simpler method of account for bond values than effective interest amortization. While straight-line amortization divides the bond’s total premium over the remaining payment periods, effective interest is used compute unique values at all points of repayment.
What does it mean to amortize a bond premium or discount?
With regards to bonds payable, the term amortize means to systematically allocate the discount on bonds payable, the premium on bonds payable, and the bond issue costs to Interest Expense over the remaining life of the bonds. (Bonds are likely to mature in 10 years or more.)
How do you calculate amortized cost 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 amortize a discount bond?
The easiest way to account for an amortized bond is to use the straight-line method of amortization. Under this method of accounting, the bond discount that is amortized each year is equal over the life of the bond. Companies may also issue amortized bonds and use the effective-interest method.
What is the effective interest rate method for amortizing bond premium?
In short, the effective interest rate method is more logical than the straight-line method of amortizing bond premium. Before we demonstrate the effective interest rate method for amortizing the bond premium pertaining to a 5-year 9% $100,000 bond issued in an 8% market for $104,100 on January 1, 2020, let’s outline a few concepts:
How do you amortize the discount on a bond?
The preferred method for amortizing the bond discount is the effective interest rate method or the effective interest method. Under the effective interest rate method the amount of interest expense in a given accounting period will correlate with the amount of a bond’s book value at the beginning of the accounting period.
What is the premium amortized in the first year?
So, the amount of the premium amortized in the first year, assuming the effective interest rate method, is equal to USD 0.762895 million. The carrying amount at the end of a given year is equal to the carrying amount at the beginning of the year less the amortization of premium.
What is amortised cost and effective interest rate (IFRS 9)?
Amortised Cost and Effective Interest Rate (IFRS 9) Last updated: 27 May 2020. Amortised cost is the amount at which some financial assets or liabilities are measuredand consists of: initial recognitionamount, subsequent recognition of interest income/expense using the effective interest method, repayments and. credit losses.
