Part I: The required method of amortizing a premium or discount on issuance of bonds is the effective-interest method.

Instructions

How is amortization computed using the effective-interest method, and why and how do amounts obtained using the effective-interest method provide financial statement readers useful information about the cost of borrowing?

Part II: Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:

1. Amortized over remaining life of old debt.

2. Amortized over the life of the new debt issue.

3. Recognized in the period of extinguishment.

Instructions
a. Develop 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 methods above is generally accepted under IFRS and how should the appropriate amount of gain or loss be shown in a company’s financial statements?