Final answer:
When a company issues a callable bond, it needs to amortize the premium or discount over the remaining term of the bond. This helps the company accurately reflect the cost of borrowing or the return on investment associated with the bond.
Step-by-step explanation:
When a company issues a callable bond, it has the option to redeem the bond before its maturity date. If a company chooses to exercise this option and call the bond, it may result in a premium or discount to the bond's face value. The premium or discount represents the difference between the call price and the face value of the bond.
For accounting purposes, a company needs to amortize the premium or discount over the remaining term of the bond. If the bond is callable, the premium or discount would be amortized until the call date or the maturity date, whichever is earlier.
Amortizing the premium or discount means that the company recognizes a portion of the premium or discount as an adjustment to interest expense or interest income over time. This helps the company accurately reflect the cost of borrowing or the return on investment associated with the bond.