If a bond’s interest period does not coincide with the
issuer’s accounting period, an adjusting entry is needed to recognize
bond interest expense accrued since the most recent interest payment. To
illustrate, assume that the stated issue date for Adidas bonds
described in Exhibit 14.10
is September 1, 2011, instead of December 31, 2011, and that the bonds
are sold on September 1, 2011. As a result, four months’ interest (and
premium amortization) accrue before the end of the 2011 calendar year.
Interest for this period equals $3,409, or 4 6 of the first six months’
interest of $5,113. Also, the premium amortization is $591, or 4 6 of
the first six months’ amortization of $887. The sum of the bond interest
expense and the amortization is $4,000 ($3,409 + $591), which equals 4 6
of the $6,000 cash payment due on February 28, 2012. Adidas records
these effects with an adjusting entry at December 31, 2011.
Point:
Computation of accrued bond interest may use months instead of days for
simplicity purposes. For example, the accrued interest computation for
the Adidas bonds is based on months.
Similar
entries are made on each December 31 throughout the bonds’ two-year
life. When the $6,000 cash payment occurs on each February 28 interest
payment date, Adidas must recognize bond interest expense and
amortization for January and February. It must also eliminate the
interest payable liability created by the December 31 adjusting entry.
For example, Adidas records its payment on February 28, 2012, as
follows:
The
interest payments made each August 31 are recorded as usual because the
entire six-month interest period is included within this company’s
calendar-year reporting period.
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