How Bond Discount is Amortized
GBS Corporation recently purchased a coupon bond at a discount. GBS must amortize the bond discount in its income statement if the bond is reported on the balance sheet at:
a. amortized cost, and fair value through other comprehensive income.
b. amortized cost, but not fair value through other comprehensive income.
c. fair value through other comprehensive income, but not amortized cost.
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Solution
To determine how GBS Corporation should account for the bond discount in its income statement, we need to analyze the options provided and understand the relevant accounting principles under IFRS.
Understanding Bond Discounts and Amortization
When a bond is purchased at a discount, it means that the purchase price is less than the face value of the bond. Over time, this discount must be amortized, which means that the company will gradually recognize this discount as an expense in its income statement. This amortization reflects the effective interest rate method or the straight-line method, depending on the company’s accounting policy.
Options Analysis
- Amortized Cost and Fair Value through Other Comprehensive Income (FVOCI):
- Amortized Cost: If a bond is measured at amortized cost, it is recorded on the balance sheet at its initial cost adjusted for any amortization of discounts or premiums. The interest income recognized will include both the cash interest received and the amortization of the bond discount.
- FVOCI: If a bond is classified as FVOCI, unrealized gains and losses are reported in other comprehensive income rather than in profit or loss. However, for bonds held at amortized cost, the discount would still be amortized and recognized in profit or loss.
- Amortized Cost but Not Fair Value through Other Comprehensive Income:
- This option implies that the bond is measured solely at amortized cost without any fair value adjustments. The bond discount would be amortized over its life, and interest income would reflect both cash received and amortization.
- Fair Value through Other Comprehensive Income but Not Amortized Cost:
- If a bond is classified as FVOCI, it can be reported at fair value with unrealized gains or losses recognized in other comprehensive income. However, if it is not reported at amortized cost, there would be no requirement to amortize the bond discount.
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Correct Answer
Correct Answer is b. Amortized cost, but not fair value through other comprehensive income.
This option indicates that GBS Corporation must amortize the bond discount in its income statement because it is reporting the bond at amortized cost. Under this classification, both cash interest received and any amortization of discounts will affect the income statement.