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44 HASKINS & SELLS June Amortization of Discount on Serial Bonds BONDS issued originally at a discount exceed in number by far those issued otherwise. An increasing proportion of these bond issues contain a provision for their redemption on a serial basis. The accounting treatment of the bond discount on the books of the issuing company becomes a practical problem of amortization. Assume an issue of 5% bonds of $10,000,- 000 is to be floated, maturing serially during the succeeding ten-year period, and the investment house underwriting the bonds agrees to take over the entire issue at 90. In making an offer of 90 the investment house perhaps will allow five points for the estimated expenses of underwriting. The profit for underwriting will depend upon the price for which the bonds ultimately are resold. A price of 98 perhaps would constitute sufficient spread between the original offer of 90 and the resale price to permit the investment house to realize a reasonable profit for underwriting the issue. The issuing company will be faced with the problem of disposing of the $1,000,000 bond discount. Two things are fairly certain about writing off the discount: (1) it is not necessary for the company to write off the entire discount in the year in which the bonds originally are issued; (2) the discount should be written off entirely by the time the last bond matures. Evidently the $1,000,000 discount is to be amortized in some way over the life of the bonds, ten years. There are several methods which may be presented for consideration. Probably the simplest method for writing off the discount is the straight-line, or equal-instalment, method. The total discount is prorated over the entire number of years that the bonds will be outstanding. In this case the discount would be written off at the rate of $100,000 per year for the ten-year period. This method provides for the distribution of the discount expense equally over the life of the bonds. It does not take into consideration the fact that the bonds outstanding during the early years constitute a much greater amount than the bonds outstanding during the later years. If the bonds are being purchased in the open market and the discount applicable to bonds purchased by the company during any year should exceed the straight-line amortization, then the larger figure would be used. Care should be taken in wording the provision for writing off the discount in case bonds are purchased annually in the open market and retired through a sinking fund. The provision may stipulate that all the discount should be written off on the bonds as they are retired through the
Object Description
Title |
Amortization of discount on serial bonds |
Author |
Anonymous |
Subject |
Bonds |
Citation |
Haskins & Sells Bulletin, Vol. 10, no. 06 (1927 June), p. 44-46 |
Date-Issued | 1927 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 10-p44 |