Principles of Financial Accounting · free preview
Amortizing Long-Term Liabilities with the Effective-Interest Method
The effective-interest method computes interest expense as the carrying value times the market rate, with the cash coupon at the stated rate, and the difference amortizes the discount or premium so carrying value walks to face at maturity.
1. The expense logic
The expense logic
2. Why expense changes each period
Why expense changes each period
3. Straight-line as the simple alternative
Straight-line as the simple alternative
4. The amortization schedule as a tool
The amortization schedule as a tool
5. First year expense
A bond is issued at a carrying value of 877,000 dollars with a market rate of 10 percent and an annual coupon of 80,000 dollars. Compute first-year interest expense under the effective-interest method.
6. Discount amortization amount
Using the same bond, first-year interest expense is 87,700 dollars and the cash coupon is 80,000 dollars. How much of the discount amortizes in year one?
7. Carrying value after year one
The bond issued at 877,000 dollars amortizes 7,700 dollars of discount in year one. Compute the year-end carrying value.
8. Straight-line limitation
Why does GAAP restrict straight-line amortization of bond discounts?
9. Total lifetime interest
A 1,000,000 dollar bond issued at 877,000 dollars pays 80,000 dollars annually for ten years. Compute total interest expense over the life in dollars, number only.
10. Premium direction
A bond issued at a premium has interest expense below the cash coupon each period, so carrying value ____ over time toward face. One word.
Practice this interactively
Free account · instant grading · spaced review that schedules itself.
Start this course for free