Unamortized discount and redemption premium on bonds refunded (supplement);

              Accounting Research
BULLETINS
Issued by the Committee on Accounting Procedure,
American Institute of Accountants, 13 East 41st Street, New York, N. Y. Copyright 1942 by American Institute of Accountants
December, 1942
No. 18
Unamortized Discount and Redemption Premium on Bonds Refunded (Supplement)
THIS BULLETIN supplements Bulletin No. 2 as to the treatment of the unamortized discount and issue cost and the redemption premium on bonds refunded (hereinafter referred to as unamortized discount).
SUMMARY STATEMENT
Where unamortized discount on bonds refunded is written off in full in the year of refunding, it is sound accounting to show such charges as a deduction in the income statement in the year of refunding in har-mony with the treatment required for income tax purposes. Where any write-off is made through surplus it should be limited to the excess of the unamortized discount over the reduction of current taxes to which the refunding gives rise, and there should be shown as a deduction (as hereinafter described) in the income statement for the year of refund-ing an amount at least equal to such reduction in current taxes.
If the alternative of spreading unamortized discount over a future period is adopted, a charge should be made (as hereinafter described) in the income statement in the year of refunding equal to the reduction in current income tax resulting from the refunding.
DISCUSSION
In Bulletin No. 2 the committee approved alternative treatments of unamortized discount and issue cost and redemption premium on bonds refunded. One alternative was an immediate write-off by a charge in the income statement or to earned surplus.
In Bulletin No. 8 in which the committee pointed out the advantages of a combined statement of income and surplus, it said: "It (the com-mittee) does not here undertake to define proper charges against earned surplus. ... It approves the current tendency to discourage such charges wherever possible."
A decision to write off the unamortized discount in the year of re-funding is based upon the view that these items represent a cost, the benefit from which has expired during the year, or a loss sustained.
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