Issuance of Bonds Is as Follows: Long-Term

¶ … Issuance of Bonds Is as Follows:

Long-Term Debt

Cash

This is because we are adding cash to the balance sheet, which is an asset, and we are adding the liability of long-term debt as well. We put debits on the left hand side and credits on the right hand side.

For the interest expense it is as follows:

Cash

Interest Expense

This is because we are debiting cash, and crediting the interest expense column. The balance sheet shrinks as the result of this payment, so there is no offset on the balance sheet, but rather there is on the income statement. There are times when at the cutoff for an accounting period there is accrued interest, so in such instances that might be recorded differently.

An amortized bond is one that has been reduced in value for records on accounting statements (Investopedia, 2013). So this is a bond sold at a discount, and the discount amount is amortized to interest expense over the life of the bond. If we go with straight line, the journal entries would look like this:

Interest Expense

XXXX

Interest Payable

XXXX

Bond Discount

XXXX

In that situation, the interest payable and bond discount would add up to the interest expense. Note there is no cash here, because this is not a cash transaction. The discount on the bond was equivalent to what the cash payment would have been -- the Long-Term Debt would simply have been smaller from the outset (Obaidullah, 2013).

2. 3

There are a few different ways to calculate depreciation and amortization. Depreciation can be calculated using the straight line method. This is simple. If an asset has a life span of 5 years and it costs $100,000, then that means that in each year a depreciation expense is $20,000, as in $100,000 / 5 = $20,000 per year.

Another method that is allowed under GAAP is the units of production method. Any measure of production can be used. So for example if expected units produced per year are 10, 50, 200, 200, 50 the depreciation expense for the first year would be (10/510*$100,000) = $1,960.

GAAP also allows for accelerated methods as well. The declining balance method is the depreciation rate * Book value, so that if the rate is 30%, the first year depreciation expense is (.3*100000) = $30,000 and the second year depreciation expense would be (.3*$70,000) = $21,000.