issuer= debtor
Acquisition w/ premium
Step1. Record acquisition at cost. Not face value!
Debt invst. at amortized cost-xyz bonds xx
cash
xx
Step2. Get the nominal interest- fixed every year
that the issuer pays to investor;
Face Value X stated interest rate
Cash xx
interest revenue
xx
Step3. Get the effective interest [Carrying value X
effective or market rate] then deduct the nominal
interest- this is to amortize the premium:
interest revenue
xx
debt invst. At ac-xyz bonds
xx
*carrying value=cost-effective interest
*interest is divided on how often payment is due
(semi annual /2 etc.)
Acquisition w/discount
Step1. Same as above
Step2. Same as above
Step3. Get the effective interest [Carrying value X
effective or market rate] then ADD the nominal
interest
If the bond year does not coincide w/ the
accounting periodentries are as follows:
Interest receivable
xx
interest revenue
xx
debt invst. At ac-xyz bonds
xx
*Example computations are as follows:
Amt in step 2 x 4/6
effective interest x 4/6
nominal interest x 4/6
Purchase of bonds between interest payment dates
Step1. Compute for interest receivable [face
amount X stated interest X months lapsed/ 12]
Step2. Entry for acquisition is same as above, but
additional debit of Interest Receivable (from step 1)
Disposal of debt instruments at amortized cost
between interest payment rates