Generally accepted accounting principles (GAAP) require that bonds issued by a company be amortized using the effective interest method, unless the straight-line method is not materially different (Accounting Standards Codification 835-30-35). Intermediate accounting textbooks make this point clear and examples, exercises and problems are consistent with that requirement. That is, until the topic moves to bonds that have been issued after the intended issue date or between interest payment dates and therefore interest has accrued.
When the topic of bonds issued between interest payment dates is addressed, the examples suddenly and inexplicably begin adopting the straight-line method. The reasons for this shift are legitimate, given the complexities of computing the amortization for partial compounding periods. While some students may not fully understand the difference between straight-line and effective interest methods of amortization, the perceptive student can be puzzled by the inconsistency. We believe that the approach taken by the textbooks is perfectly understandable, but that this provides an opportunity to deepen the students’ understanding of bonds and the difference between effective interest and straight-line amortization.
This article is from the Accounting Instructor’s Resource, an electronic journal that provides teaching tips and insights to those who teach accounting and other business courses.
Timothy B. Forsyth, Appalachian State University
Philip R. Witmer, Appalachian State University