Amortization of a Bond
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In the accounting perspective, bond amortization refers to the process of allocating the discount or the premium of a bond to the interest expense in the lifetime of the bond. There are various ways to amortize a bond (Kimmel, Weygandt, & Kieso, 2011). In this case, the paper will discuss the effective interest method of amortizing both a bond discount and a bond premium.
The effective interest method of amortization provides that the annual interest expense is compounded annually across the lifetime of the bond. Nevertheless, the method shows that there is a positive correlation between the book value and the annual interest expense of the bond in the particular accounting period. In this case, the effective interest method provides a balancing effect in the statements of financial position and the income statement. The interest expense is recorded in the income statement while the value of the bond in the balance sheet. Therefore, when the interest expense increases the book value also increases. Consequently, when the interest expense decreases, the book value also decreases (Warren, Reeve, & Duchac, 2014).
Ideally, a bond discount refers to a bond that is issued at a value below the par value. The discount value has to be allocated over the entire interest expense of the both. The debit balance in the bond payable discount is thus transferred to the interest expense account. As a result, it wil…
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