- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments
CFA Practice Question
Oakmont Corporation issued $100,000 of callable bonds on 1/1/2015 at a coupon rate of interest of 7%. The bonds sold at a discount which resulted in an effective yield of 8% to the bond investors. On January 1, 2016, the yield on these bonds fell to approximately 7% as market conditions led to an increase in bond prices. What change, if any, should Oakmont make to its accounting records to reflect the change in the yield?
A. Increase the carrying value of the bonds payable
B. Compute future interest expense based on the 7% new effective rate
C. No change is made to the accounting records.
Explanation: The only yield used to compute the carrying value is the one in effect when the bonds are sold. After that time, the bonds are always valued at that historical cost adjusted for amortization.
User Contributed Comments 2
| User | Comment |
|---|---|
| Pooh | Note: the cost of issuing the bond is at the yield when the bond is initially sold. |
| StanleyMo | i think it will change the cash flow. |