Section 2: 30–40%2H
Long-Term Debt (Financial Liabilities)
Bond accounting tests effective interest method almost exclusively — AICPA rarely tests straight-line anymore. The trap: when a bond is issued at a premium, candidates sometimes subtract interest expense incorrectly. Remember: premium bonds have a stated rate above market, so the premium amortizes DOWN each period, reducing the carrying value. Also watch for bond issuance costs — under current GAAP they reduce the carrying value (debt issuance cost contra), not capitalize separately.
What AICPA Wants You to Know
- 1Calculate the issue price of bonds using present value concepts
- 2Apply the effective interest method to amortize bond premium or discount
- 3Record early retirement of bonds and calculate gain or loss
- 4Distinguish between coupon rate and market (effective) interest rate
- 5Understand the relationship between bond price and interest rates