Question

Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue. What is the treatment of bond issue costs?

1) They are expensed immediately in the period incurred.
2) They are capitalized as a deferred charge and amortized to expense over the life of the bond issue.
3) They are recorded as a liability on the balance sheet.
4) They are not recorded in the financial statements.

Answer 1

Bond issue costs are capitalized and amortized over the life of the bond issue, aligning with the principles of accounting where costs are matched with the revenue-generating periods.

Step-by-step explanation:

The treatment of bond issue costs is as follows: they are capitalized as a deferred charge and amortized to expense over the life of the bond issue. This means that rather than being expensed immediately when incurred, these costs are spread out and recognized as an expense on the income statement gradually over the term of the bond. This method reflects the matching principle in accounting, where costs are matched to the periods in which they help generate revenues.

Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue. This means that they are not expensed immediately in the period incurred, but rather treated as an asset and spread out over time. So, the correct answer to the question is 2) They are capitalized as a deferred charge and amortized to expense over the life of the bond issue.