A finished ACC-371 Topic 3 effective interest amortization schedule example, pricing a discounted bond issue, amortizing it by effective interest and explaining what the issue price reveals. Searches like "acc 371 topic 3 assignment example", "acc371 topic 3 sample" and "acc-371 topic 3 example" land here.
What a finished ACC-371 Topic 3 effective interest amortization schedule looks like
The example starts with the price, not the schedule. Ten semiannual coupons of $30,000 and the $1,000,000 face are discounted at the 4 percent market rate per period, giving $675,564 for the face and $243,327 for the coupons, an issue price of $918,891 and a discount of $81,109, all figures illustrative. A short paragraph explains the discount: investors could earn 8 percent elsewhere, so they paid less for a 6 percent coupon, and that says nothing about the issuer's health. The schedule follows. In the first period interest expense is 4 percent of $918,891, or $36,756, cash paid is $30,000, and $6,756 of discount is amortized, lifting the carrying amount to $925,647. A side column shows the flat $8,111 of straight-line amortization the method replaces, and why it misstates the rate each period.
How an ACC-371 Topic 3 example is structured
Pricing, schedule and interpretation are kept in three separate parts so a reader can check each without the others. The opening states the terms: face amount, coupon rate, payment dates, maturity and the market yield on the issue date. The pricing part discounts the face and the coupons separately at the per-period market rate, showing both present values and their total. A journal entry records the issue, with the discount carried in a contra account. The schedule itself runs all ten periods, with columns for cash paid, interest expense, discount amortized and carrying amount, closing at exactly face value on the maturity date. A comparison block sets the first three periods against straight-line amortization and states the rate each method implies. Interpretation finishes the example, explaining the discount in market terms and noting that the cash flow statement generally reports the $30,000 paid, not the expense, within operating activities.
Face and coupons discounted separately
The single payment at maturity and the stream of ten coupons each get their own present value, which makes the source of the issue price visible line by line.
The discount read as a market signal
A coupon below the market yield forces a lower price, and the example says plainly that the gap reflects rates on the issue date, not credit trouble at the issuer.
Expense set by the carrying amount
Each period's interest expense is the market rate times the opening carrying amount, so the expense grows as the discount is worked off toward face.
A schedule that lands on face value
The final carrying amount equals $1,000,000 exactly, a built-in check that the rate, the periods and the rounding were handled consistently throughout the table.
Straight-line shown as the rejected method
Flat amortization of $8,111 a period is placed beside the effective figures, revealing an implied rate on the carrying amount that drifts when it should hold steady.
Where marks go in ACC-371 Topic 3
An amortization table can foot perfectly and still be marked wrong for its method. Amortizing the discount straight-line, where the instructions or the size of the difference call for effective interest, produces a constant dollar charge on a changing balance, which is a changing rate. Using the annual 8 percent against a semiannual carrying amount doubles the expense in every row. Pricing the bond at the coupon rate, so that it issues at face, removes the discount the problem is about. A schedule that never reaches $1,000,000 at maturity signals a rounding or period error that markers trace quickly. The interpretive loss is quieter: a paper that calls the discount a cost the company chose, or a sign of weak credit, has misread what the issue price says about market rates on the day of sale.
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ACC-371 Topic 3 questions, answered
When is straight-line amortization acceptable?
US GAAP requires the interest method but permits another method when its results are not materially different. On a short bond with a small discount the two can land close together. On this bond they diverge, and many sections ask for effective interest regardless, so the example uses it and shows the straight-line figures only for comparison. The method named in the instructions governs.
What changes when a bond issues at a premium?
The direction, not the logic. A coupon above the market yield makes investors pay more than face, and the premium is amortized so that interest expense each period is less than the cash coupon. The carrying amount falls toward face instead of rising toward it. The schedule keeps the same columns, and the final carrying amount still equals face value exactly on the maturity date.
How is the discount presented on the balance sheet?
As a reduction of the bond liability. The bonds payable account carries the face amount, and the unamortized discount is subtracted from it, so the net figure reported equals the carrying amount in the schedule for that date. Debt issuance costs, where a problem includes them, are also generally presented as a direct deduction from the carrying amount of the debt under current US GAAP.