Part I
The appropriate method of amortizing a premium or discount on issuance of bonds is the effective interest method under IFRS. PE GAAP allows either the effective interest rate or the straight-line method.
Part II Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:
1. They can be amortized over the remaining life of old debt.
2. They can be amortized over the life of the new debt issue.
3. They can be recognized in the period of extinguishment.
Instructions
(a) What is the effective interest method of amortization and what are the differences and similarities between it and the straight-line method of amortization?
(b) How is interest calculated using the effective interest method? Why and how do amounts that are obtained using the effective interest method differ from amounts that are calculated under the straight-line method?
Instructions
Part II
(a) Provide supporting arguments for each of the three theoretical methods of accounting for gains and losses from the early extinguishment of debt.
(b) Which of the above methods is generally accepted as the appropriate amount of gain or loss that should be shown in a company’s financial statements?