26 CFR § 1 163-3 Deduction for discount on bond issued on or before May 27, 1969. Electronic Code of Federal Regulations e-CFR LII Legal Information Institute

bond issued

M Corporation should treat $5,000 ($100,000-$95,000) as the total amount to be amortized over the life of the bonds. Without prejudice to the solution in part , assume that the issue price was %884,000. Prepare the amortization table for 2011, assuming that amortization is recorded on interest payment dates. Downs Company issued $800,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? The Amortization of Premium/Discount, object code 4429 is reported on the same object level (Financial/Debt Services) as 4400 Interest Expense. Amortization of a premium will decrease the total interest expense on the auxiliary’s financial statements and amortization of a discount will increase interest expense.

What is the meaning of Unamortized?

Meaning of unamortized in English

An unamortized debt or cost has not been reduced by small regular amounts: We have included the unamortised part of the expenses in the calculation. All unamortized amounts relating to the terminated lease have been written off. Related word.

These concepts are implemented in the spreadsheet below, with key takeaways highlighted in yellow. On the Unamortized Bond Discount Definition 1 tab, we explore how to model interest on a bond issued at a discount, as well as amortization of that discount. On the OID 2 tab, we add a twist—the debt is repaid before the original issue discount has fully amortized.

Amortization of Bond Discount – Explained

Covenants are negotiated between a https://personal-accounting.org/ entity and its lenders and may vary from agreement to agreement. Financial ratio covenants, which require the reporting entity to maintain various financial ratios, are included in nearly every debt agreement. A breach of a covenant triggers an event of default which may allow the lender to demand repayment (i.e., it becomes puttable). When the exercisability of a call option is subject to a contingency, the reporting entity should consider the effect of the contingency on the likelihood the reporting entity can exercise its call option. In circumstances where the contingency is remote, the estimated life of the debt instrument and its contractual maturity should be the same. For the second interest period, bond interest expense will be $11,271 ($93,925 x 12%) and the discount amortization will be $1,271.


Over the life of the bond, the OID amortizes and the book value of the bond accretes to its face value, as seen in the chart to the right. On the financial statements, the “Loss on Unamortized OID on Repayment” counts as another expense on the Income Statement. The bond’s coupon rate is below the rates of other, similar bonds, and the company needs to incentivize investors to buy it even though the investors could earn higher interest elsewhere. One should note that the discount, premium, and issue costs are amortized properly up to the moment when the book value of the bonds is needed. For simplicity, let’s assume a firm issuing a 3 year bond with a face value of $100,000 has an annual coupon rate of 8%.

Understanding Unamortized Bond Premium

It is determined by market influences such as interest rates, inflation and credit ratings. Bonds can be sold at a discount or a premium, depending on the market. The carrying value, on the other hand, is a calculation accountants use to record the impact of the premium or discount on the bond issuer’s financial statements.The carrying value is the net value of an issued bond for the bond issuer. It is calculated based on the amount of the bond premium or discount, the elapsed time in the term of the bond and the amount of amortization that has already been recorded. The reverse of an unamortized bond discount is the unamortized bond premium. This premium arises when a bond is sold at a higher price than its face value. The situation arises when the coupon interest rate is higher than the current market interest rate, so investors are willing to pay more to acquire the bond.

  • The premium or discount is amortized, or spread out, on financial statements over the life of the bond.
  • The semiannual interest paid to bondholders on Dec. 31 is $450 ($10,000 maturity amount of bond × 9% coupon interest rate × 6/ 12 for semiannual payment).
  • At the end of your fifth year of payments, the monthly payment figure remains the same.
  • A bond certificate is issued to the investor to provide evidence of the investor’s claim against the company.
  • Company A recorded the bond sale in its accounting records by increasing Cash in Bank , Bonds Payable and the Discount on Bonds Payable (debit contra-liability).

We believe that the subsequent accounting for deferred costs is based on the facts and circumstances. Once the debt is drawn, the reporting entity should record the debt on its balance sheet, derecognize the commitment fee asset, and record the commitment fee as a component of the debt’s amortized cost basis. The adjustment to the amortized cost basis will be amortized over the term of the debt as component of the debt’s effective yield. If a reporting entity borrows a portion of the debt, only a proportionate amount of the commitment fee asset should be recognized as an adjustment to the amortized cost basis of the debt drawn. Assume instead that Lighting Process, Inc. issued bonds with a coupon rate of 9% when the market rate was 10%. The bond purchaser would be willing to pay only $9,377 because Lighting Process, Inc. will pay $450 in interest every six months ($10,000 × 9% × 6/ 12), which is lower than the market rate of interest of $500 every six months.

Leave a Comment