AMORTIZATION OF BOND DISCOUNT Meaning and
Definition
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Amortization of bond discount refers to the gradual reduction or smooth distribution of a bond's discount over its remaining life or maturity period. When a bond is issued at a price below its face value, it is said to be sold at a discount. The discount represents the difference between the bond's face value and its market price at the time of issuance.
Amortization of bond discount is a process used to recognize the discount as an expense or loss over the bond's life. This process ensures that the bondholder's interest expense is allocated properly and reflected in the financial statements over time.
Typically, the discount is amortized using the effective interest rate method. Under this method, the total amount of bond discount is divided by the number of periods over which the bond is outstanding. Each period, a portion of the discount is added to the interest expense, increasing it gradually until the bond reaches its face value at maturity.
The purpose of amortization of bond discount is to align the bond's interest expense with the bond's carrying value, ensuring accurate and consistent reporting of financial statements. This amortization process is important for both bond issuers and bondholders, as it affects the bond's cost of borrowing and interest income, respectively.
In summary, the amortization of bond discount is the systematic recognition of the difference between a bond's face value and its market price at the time of issuance. It guarantees that the bondholders' interest expense is properly allocated and reported over the bond's life.
