When a company issues bond or debenture, company has to pay the professional fees, registration fees and other issue cost, all these cost are long term asset. For written off all these cost, we need to amortization of bond issue cost.
In simple words, amortization of bond issue costs is the transfer of bond issue cost from asset to the debit side of profit and loss account. On the basis of life of bonds, we will amortize. If there is $ 2,00,000 bond issue cost and life of bond is 10 years. We will amortize $ 20,000 from total bond issue cost because we are taking benefit from $ 20,000 bond issue cost. Every year, we transfer $ 20,000 to the debit side of profit and loss account or showing as expense in income statement. After 10th year, there will not any balance of bond issue cost in the asset side of balance sheet.
Reason of Amortization of Bond Issue Costs
1. When we paid large amount of bond issue cost, we can not take the benefit from this expense. So, this expense became a capital expenditure. After issuing bond, we got the money. So, upto the life of bond, we have used this money. So, we divide total bond issue cost with the life of bond. Every year, we show just this part out of total bond issue cost in the income statement.
2. Bond Issue Costs is just like expenses paid in advance but services are not received. So, there is no right to show all bond issue cost in expenses side of income statement. We follow accounting standard and as per accounting standard, we just convert total bond issue costs in small parts. Every part will be transfer to expense side of income statement as amortization.
In simple words, amortization of bond issue costs is the transfer of bond issue cost from asset to the debit side of profit and loss account. On the basis of life of bonds, we will amortize. If there is $ 2,00,000 bond issue cost and life of bond is 10 years. We will amortize $ 20,000 from total bond issue cost because we are taking benefit from $ 20,000 bond issue cost. Every year, we transfer $ 20,000 to the debit side of profit and loss account or showing as expense in income statement. After 10th year, there will not any balance of bond issue cost in the asset side of balance sheet.
Reason of Amortization of Bond Issue Costs
1. When we paid large amount of bond issue cost, we can not take the benefit from this expense. So, this expense became a capital expenditure. After issuing bond, we got the money. So, upto the life of bond, we have used this money. So, we divide total bond issue cost with the life of bond. Every year, we show just this part out of total bond issue cost in the income statement.
2. Bond Issue Costs is just like expenses paid in advance but services are not received. So, there is no right to show all bond issue cost in expenses side of income statement. We follow accounting standard and as per accounting standard, we just convert total bond issue costs in small parts. Every part will be transfer to expense side of income statement as amortization.
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