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Reporting Bond Liability on the Balance Sheet, Proceeds $975,000

Sold $1 million in bonds, 20 years at 4% with interest paid semi-annually. The proceeds from the bonds was $975,000

Each of the following was suggested as a possible valuation basis for reporting the bond liability on the balance sheet.

1. $975,625 (proceeds, plus 6 months straight line amortization)
2. $1 million (face value)
3. $1,780,000 (face value plus interest payments)

Evaluate each of the three suggested alternatives for reporting the bond liability in the balance sheet. Give arguments for and against each alternative, taking into consideration the investor and the reporting company.

Solution Preview

1. Amortizing the discount evenly over the life of the bond

Advantage: The discount is a way to pay the investor more interest and so spreading that additional compensation over the life gives the firm and the investor a better sense of the true interest costs and therefore realistic profits.

Disadvantage: The liability is reduced by the unamortized discount and that makes it seem like ...

Solution Summary

Your tutorial is 242 words and gives one advantage and one disadvantage for each of the three valuation choices.