Accounting Research September 1939
issued by the Committee on Accounting Procedure, American Institute of Accountants, 13 East 41st Street, New York, N. Y.
Copyright 1939 by American Institute of Accountants
Unamortized Discount and Redemption Premium on Bonds Refunded
THE treatment of unamortized discount and redemption premium at the retirement of bonds by the creation of new debt well illus-trates some of the recent developments and tendencies of accounting, and has been the subject of extended study and pronouncement by regulatory bodies. It has therefore been selected by the committee as the appropriate subject for its initial major study, and the results are presented in greater detail than will be necessary for some other topics.
Discussion of the question in the past has revolved mainly about three methods of disposing of the unamortized balance:
1. A direct charge to earned surplus;
2. Amortization over the remainder of the original life of the issue retired; or
3. Amortization over the life of the new issue.
Each of these methods has found considerable support in regulatory decisions and technical discussions. The conclusions reached by the committee in regard to them are given here.
1. The first alternative, writing off the amount to earned surplus when the refunding takes place, conforms more closely than any other to hitherto accepted accounting doctrines and has the support of a decision of the Supreme Court and the approval of many regulatory bodies.
In the opinion of the committee it is clearly a permissible method, and there is no occasion for qualification of the report in cases in which it is employed. At the same time, this method is open to the objection that while conservative with respect to the balance-sheet, it tends to produce an understatement of income charges for the cost of borrow-ing. The committee attached weight to this objection, especially in view of the growing recognition of the importance of the income ac-