Final Answer:
To calculate straight-line amortization for bonds issued at a discount, subtract the bond's face value from its issue price to find the discount. Then, divide the discount by the bond's maturity period in years to determine the annual amortization amount, which is evenly spread over the bond's life.
Step-by-step explanation:
Straight-line amortization is a method used to allocate the discount on bonds issued at a price below their face value evenly over the bond's life. The first step is to find the discount by subtracting the bond's face value (F) from its issue price (P), giving the formula for discount (D) as D = P - F. Next, determine the bond's maturity period in years (n).
The annual amortization amount (A) is then calculated by dividing the discount by the maturity period, expressed as A = D/n. This ensures a consistent, linear reduction in the discount each year.
For example, if a $1,000 face value bond is issued at $950 with a maturity period of 5 years, the discount is $50 ($1,000 - $950). The annual amortization amount would be $10 ($50 / 5 years).
Each year, $10 is subtracted from the discount until it reaches zero by the bond's maturity. This method simplifies the accounting for bonds issued at a discount and ensures a gradual adjustment to the carrying value of the bond on the issuer's balance sheet over its life.