ACC 100 Study Guide - Book Value, Effective Interest Rate, Gift Card

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Proceeds from bond issue = present value of interest payments + present value of principal repayment. Derecognition ( bond has matured and is retired by paying back principle to investors) Selling bonds at a discount (bonds sold less than face value) Occurs when the market interest rate is greater than the coupon rate. Discount if the difference between face value and proceeds. Discount is amortized over the life of the bond and the amortized portion is included in interest expense. Annual interest expense = liability at beginning * effective interest rate (market rate) The amount of discount that amortized in a period is the difference between the interest expense and the amount of interest paid (based on coupon rate) Scenario 3: selling bonds at a premium (bond price > fair value) Occurs when coupon rate is greater than the market rate (opposite of discount bonds) Premium is the difference between the proceeds and face value.

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