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.
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 are the two methods of amortization of bonds discount premium?
Effective-interest and straight-line amortization are the two options for amortizing bond premiums or discounts.
Why do you amortize bond discounts?
A bond discount occurs when an issuer sells a bond and receives proceeds from investors for less than the face value of the bond. By amortizing a bond discount, the amount of amortization for each period can be used to determine periodic interest expense, as well as the changing bond carrying value over time.
How do you amortize bond premium or discount?
Bond Premium Amortized= P x R – N x Y
- P = Bond issue price,
- R = Market Rate of interest,
- N = Nominal or face value and,
- Y = coupon rate of interest/ Yield.
What is the amortization rate?
In an amortization schedule, the percentage of each payment that goes toward interest diminishes a bit with each payment and the percentage that goes toward principal increases. Take, for example, an amortization schedule for a $250,000, 30-year fixed-rate mortgage with a 4.5% interest rate.
How do you prepare a bond amortization schedule?
The following steps are used to prepare the schedule using this approach:
- Calculate the current balance of the bond payable by discounting its remaining cash flows. …
- Divide the total discount or premium by the number of remaining periods in order to determine the amount to amortize in the current period.
How do you do straight line amortization?
The straight line amortization formula is computed by dividing the total interest amount by the number of periods in the debt’s life. This amount will be recorded as an expense each year on the income statement.
What are the different methods of amortization?
Amortization methods include the straight line, declining balance, annuity, bullet, balloon, and negative amortization.
Do you have to amortize bond premiums?
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.
Is bond discount an asset?
The issuing company can choose to expense the entire amount of the discount or can handle the discount as an asset to be amortized. Any amount that has yet to be expensed is referred to as the unamortized bond discount. … So the bond will be priced at a discount to its par value.
What happens to bond book value as a discount is amortized?
The carrying value of a bond refers to the net amount between the bond’s face value plus any un-amortized premiums or minus any amortized discounts. … Premiums and discounts are amortized over the life of the bond, therefore book value equals par value at maturity.
What happens to bond book value as a discount is amortized increases or decreases?
The amount of the bond discount is amortized to interest expense over the bond’s life. As a bond’s book value increases, the amount of interest expense increases.