Therefore, the interest rate is constant over the term of the bond, but the actual interest expense changes as the carrying value of the bond changes. Under the effective interest method, a constant interest rate-equal to the market rate at the time of issue-is used to calculate the periodic interest expense. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' Is the Effective Interest Method of Amortization? He is currently the owner of Mad Hat Labs, a web design and media consultancy business. Accessed July 24, 2020.Ī published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. "Chapter 493: Stock Without Par Value," page 1. "658.23 Submission of articles of incorporation contents form approval filing commencement of corporate existence bylaws." Accessed July 24, 2020.
"Treasury Bills." Accessed July 24, 2020. Department of the Treasury, Bureau of the Fiscal Service. "How Are Municipal Bonds Quoted and Priced?". Municipal Securities Rulemaking Board."Publication 550: Investment Income and Expenses." Accessed July 24, 2020. Double Entry Bookkeeping: Straight Line Bond Amortization.Vertex42: Loan Amortization Table in Excel.Accounting Coach: Amortizing Bond Discount with the Effective Interest Rate Method.Accounting Coach: Bond Discount with Straight-Line Amortization.What Are the Advantages and Disadvantages. The amortized cost would be $600 per year, or $50 per month. If you calculate it monthly, divide the discount by 60 months. For an annual reporting of a five-year bond, this would be five. Simply divide the $3,000 discount by the number of reporting periods. Suppose, for example, a company issues five-year bonds for $100,000, but due to a $3,000 discount, it receives only $97,000 from investors. The straight-line method uses the same amount of bond discount during each reporting period using the following formula:Īmortization = (Bond Issue Price – Face Value) / Bond Term The journal entry for amortizing a bond's discount cost on a balance sheet is usually listed as an interest expense.
If the company issues monthly statements, the bond's amortization cost should also be calculated monthly. If a corporation issues financial statements only once a year, the amortization cost can be recorded annually or semiannually depending on how the bond's anniversary month aligns with the company's year end. This is the easy way to calculate an amortized cost.
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