In reviewing the treatment of discount and premium bonds on the income statement several questions came up that I am hoping someone can help me with. 1. how is the amorization amount for discount and premium bonds reflected on the income statement since the discount bonds will amortize up to par and vice versa for the premium bond, is one shown as a negative number and one a positive? 2. Since the Net Income includes subtractions for both the int exp and the amortization amount is the net impact of the both just the equivalent of the cash coupon amount? 3. If what I said in 2 is right, then when calculating CFO either using direct or indirect produce an interest exp that is equal to the int exp on the income statement, either directly or indirectly by backing out Depreciation & Amortization in the indirect calculation? I am under the impression that for cash flow purposes it is the coupon payment that is used in CFO and this leads to the over/understatement of CFO for discount & premium bonds but I am not seeing how we arrive at the cash coupon amount by using the income statement and backing out amortization since again I was under the impression it is just the difference between the int exp and the cash coupon payment. Please tell me what I am missing here.
My understanding is that there is no treatment for Premium or Discount bonds with respect to the income statement: Premium and discount bounds are a measure of the coupon payment relative to the market yield. The coupon payments by the firm are fixed and not a function of the market interest rate.
only interest expense appears in the income statement. the coupon rate is what is paid. The difference is a balance sheet item bringing the book value of the liability to par.