Bonds Payable

FAR loves to make you build an effective-interest amortization table: interest expense equals the carrying value times the market (yield) rate, while cash paid equals face times the stated rate, and the difference amortizes the discount or premium. The classic MCQ tell is being handed both rates plus a beginning carrying amount and asked for year-2 interest expense or the ending carrying value — the trap answer multiplies by the stated rate or uses face value instead of carrying value. Remember the direction: under a discount, carrying value and interest expense rise each period; under a premium, they fall, always converging toward face at maturity.

The classic confusion is method choice. GAAP requires the effective-interest method unless straight-line is not materially different; straight-line spreads the discount/premium evenly for constant expense (some older banks still drill it). Don’t confuse stated rate (the cash coupon) with market rate (expense), and report bonds payable net of unamortized discount/premium, not at face. Bond issuance costs reduce that carrying amount — not a separate asset.