Does anyone know how the amortization on discount and Premium bonds is reflected on the income statement since one is amortized up to par and the other down, and then for the purposes of Net Income do you subtract out the amor on a discount bond and add in the amor for a discount bond?
CPK is the best person at explaining such topics. Here is my explanation. At purchase: Interest rate = I%, Price = BV(0), Coupon = C%, Face value = F. Interest expense(1) = BV0*I% //notice here that I is always interest rate at purchase of the bond not current rate. Coupon payment(1) = C%*F New book value BV(1)=BV(0)+I(1)-C(1). For discount bonds (I>C) -> BV goes up, premium bonds (I
Somewhat but I am really interested in two points, 1. since premium bonds are amortized down to par and discount up to par on the balance sheet under liabilities than wouldnt the amotization have to be an amortized subtraction from NI for discount bonds and an amortized addition for premium bonds on the income statement?
Sorry I meant wouldnt the amortization have to be added to operating income on the income statement and the amortization from a premium bond subtracted to arrive at Net Income. My reasoning being that since for the discount bond INT Exp is higher than the coupon and the bond is amortized up than the amortization has to be subtracted on the income statmenet where as for the premium it would be the opposite and the amortization would actually have to be added to operating income to arrive at Net income since the Int exp is lower than coupon we need to take out the difference by subtracting the amortization amount in the case of the premium bond.
From what I remember, only interest expense shows up on the income statement.
You know the more I look at it the more I think you are right, the amortizion of the discount/premuim only serves to increast or decrease the BV each period on the Balance sheet and only the Int Exp BV times Market I rate at issuance is reflected on the income statement. What was confusing me is the fact that for Intagible assets that are capitalized there is this Amortization exp on the income statement but I now believe the two things are totally different.