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First, calculate the bond premium by subtracting the face value of the bond from what you paid for it. Then, figure out how many months are left before the bond matures and divide the bond premium by the number of months remaining. That tells you how much to amortize on a monthly basis.
How do you amortize a discount bond?
Under the straight-line method, bond discount amortized in each period will equal total bond discount divided by total number of periods. In this case, it works out to $7,370 (=$147,409/20). Where BD is the total bond discount, n is the bond life in year and m is the total coupon periods per year.
What is amortization of bond discount?
Amortization is a process carried out to reduce the cost base of a bond for each period to reflect the economic reality of the bonds approaching maturity. The amortization is done at par. It is easy to prepare, and it is essential in calculating tax returns.
What is the amortization of premium on bonds payable?
The amortization of the premium on bonds payable is the systematic movement of the amount of premium received when the corporation issued the bonds. Over the life of the bonds the premium amount will be systematically moved to the income statement as a reduction of Bond Interest Expense.
If the bond yields tax-exempt interest, you must amortize the premium. As long as the bond is held to maturity, there will be no capital gain or loss associated with the bond. If the bond is sold before maturity, you may have capital gain or loss based is the portion of the premium which has not yet been amortized.
Why is bond discount amortized?
When a bond is sold at a discount, the amount of the bond discount must be amortized to interest expense over the life of the bond. This means that as a bond’s book value increases, the amount of interest expense will increase.
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. The straight-line method allocates a fixed portion of the bond discount or premium each interest period to adjust the interest payment to interest expense.
What are the different methods of bond amortization?
There are two primary methods of bond amortization: straight-line method and effective interest rate method. An amortization schedule lists bond payments, bond discount amortization and interest expense for each period. Bond discount arises when the rate of return expected in the market on a bond is higher than the bond’s coupon rate.
How does the company calculate the discount to amortize?
The company calculates the amount of premium or discount to amortize by multiplying the market interest rate by the book value of the bond. These amortization methods contain several similarities. The amortization methods both record the amortization as interest. If the company amortizes a premium, the interest reduces net income.
When to use effective interest or periodic amortization?
When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will a. increase if the bonds were issued at a discount. Moreover, what is the effective interest method of amortization?