FAR, Financial Accounting and Reporting

Sources for Debt: Bonds and the Effective Interest Method

Last reviewed 2026-10-08

The standards and authorities behind PocketCPA's FAR lessons on Debt: Bonds and the Effective Interest Method. The topic rests on ASC 470.

About this topic

A bond is a loan in tradable form. The borrower promises to repay a set amount on a set date, and to pay interest along the way.

More precisely, a bond is a formal promise to repay a fixed principal (the face or par value) at a stated maturity date, and to pay periodic interest at a fixed contractual rate.

Key points

A bond issued at a premium has a stated rate above the market rate; issued at a discount, the stated rate is below.
The effective interest method allocates interest expense based on the carrying amount times the market rate at issuance.
Debt issuance costs are presented as a direct deduction from the carrying amount and amortized over the debt's life.
Early extinguishment gains or losses are the difference between the reacquisition price and the net carrying amount.

What the lessons cover

Three rates that must stay separate
Pricing a bond: the present value of two cash-flow streams
The effective interest method (ASC 835-30-35-2)
Worked example: a discount bond with a full amortization schedule
Worked example: issuance at a premium
Debt issuance costs (ASC 835-30-45-1A)
Early extinguishment of debt (ASC 470-50-40-2)
Modification or extinguishment: the 10 percent cash-flow test (ASC 470-50-40-10)
Troubled debt restructurings (ASC 470-60)
Balance-sheet classification (ASC 470-10-45)
Liabilities that look like equity (ASC 480)

Authoritative references

ASC 470-10-45 and 45-14, balance sheet classification, and the two ways a refinancing intent to exclude short-term debt from current liabilities is demonstrated.
ASC 470-10-50-1 and 50-6, disclosure of the aggregate maturities and sinking fund requirements for each of the five years following the balance sheet date, and of the terms of unused commitments for long-term financing.
ASC 470-20-25-2, debt issued with detachable warrants: proceeds allocated by relative fair values, with the warrants' portion in paid-in capital.
ASC 470-20-25-12 and 25-13, convertible debt as a single liability with no portion allocated to the conversion feature, and the amount attributable to a conversion feature credited to additional paid-in capital; ASU 2020-06 removed the beneficial conversion feature and cash conversion models from ASC 470-20.
ASC 470-50-15-3, the scope exclusion for conversion of a convertible instrument into the issuer's equity.
ASC 470-50-40-2, early extinguishment of debt.
ASC 470-50-40-7, the exclusion of transactions among debt holders.
ASC 470-50-40-10 and 40-12, the 10 percent cash-flow test that decides whether a modification or exchange is an extinguishment, and the amounts included in the test.
ASC 470-50-40-17 and 40-18, fees paid to or received from the creditor, and costs paid to third parties.
ASC 470-50-45-1 and 45-2, the former extraordinary-item paragraphs, superseded by ASU 2015-01.
ASC 470-60-35-2 and 35-3, a troubled debt restructuring settled by transferring assets: the gain on restructuring of payables, and the gain or loss on transfer of assets.
ASC 470-60-35-5, 35-6 and 35-8, a restructuring that changes terms only, where the debtor's test uses the total future cash payments, undiscounted.
ASC 470-60-50-1, disclosure of the aggregate gain on restructuring of payables recognized in the period.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.