Chapter 15 Long-Term Liabilities Prepared by: Debbie Musil Kwantlen University College

Appendix 15A: Effective-Interest Amortization Three steps to calculate amortization: 1. Calculate bond interest paid 2. Calculate interest expense 3. Amortization amount is difference Bond Interest Paid Bond Interest Expense ÷ = Amortization Amount Face Value of Bonds Contractual Interest Rate Carrying Value of Bonds at Beginning of Period Market Interest Rate x x

Amortizing Bond Discount For the first interest period: 1. Calculate bond interest paid = $1,000,000 x 5% x 6/12 = $25,000 2. Calculate interest expense = $957,345 x 6% x 6/12 = $28,720 3. Determine amortization amount = $25,000 - $28,720 = $3,720 Subsequent periods are calculated in a similar manner Carrying value of bond increases for each period based on amortization of discount

Amortizing Bond Premium For the first interest period: 1. Calculate bond interest paid = $1,000,000 x 5% x 6/12 = $25,000 2. Calculate interest expense = $1,044,915 x 4% x 6/12 = $20,898 3. Determine amortization amount = $25,000 - $20,898 = $4,102 Subsequent periods are calculated in a similar manner Carrying value of bond decreases for each period based on amortization of premium

COPYRIGHT Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.