Total interest expense, which is reported on the income statement, includes the total coupon payment plus a portion of the underappreciated discount or premium for the specified accounting period.
U.S. GAAP allows companies to amortize premiums or discounts by utilizing a straightline amortization or the effective interest rate method.
 Straightline Depreciation
Formula 9.2 Depreciation amount = premium or discount at issue Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â payment periods 
Example
Company ABC issues a $1m bond that will pay a 11% semiannual (coupon) for five years and similar bonds are paying 10%. Bond premiums are amortized using straightline depreciation. The company issues at $1,038,609 and face value is $1m.Interest expense = coupon payments  unamortized portion of bond premium for the period
The carry value = total market value at time of issue  cumulative amortized premium or discount
Unamortized portion of bond premium for every period (six months in this example) = $38,609 / (10 payment periods) = $3,860.9
Result
Under this method the issuing company will recognize an equal amount of unamortized depreciation for every period.

Effective Interest Rate Method
Effective interest rate method results in an interest expense that is a constant percentage of the carrying value of the bonds; thus interest expense varies from period to period. In contrast, the straightline method results in a constant interest expense from period to period.
Formula 9.3 Interest expense = current interest rate at time of issueÂ x carry value 
The carry value = total market value at time of issue  cumulative amortized premium or discount
Formula 9.4 Amortized premium (discount) = coupon payment  interest expense 
Example
Company ABC issues a $1m bond that will pay a 11% semiannual (coupon) for five years, and similar bonds are paying 10%. Bond premiums are amortized using the effective interest rate depreciation method. The company issues at $1,038,609 and face value is $1m.
Reporting The Retirement Or Conversion of Bonds

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