Measuring liabilities using a discount rate (investment return assumption) based on a high-grade corporate bond discount
rate of 5.
If the bond discount
is large, pushing the taxpayer into a higher tax bracket, a more comprehensive strategy may be to sell some bonds before maturity but after the taxpayer has retired and is subject to a lower marginal tax rate.
Of the bond discount
of $36 a year ($720 divided by 20 years), $33 (11/12 of $36) is includable in Mr.
In fact, Florida law in this area may be at odds with prudent investor rule obligations imposed on trustees,4 and the described lack of authority for bond discount
accretion and prohibition on bond premium amortization should be considered by trustees in determining whether to utilize a power to adjust ([section]738.
He said those in Congress who believe that granting a temporary two-year corporate bond discount
favor to defined benefit plan sponsors will create pressure for the needed comprehensive reform of the pension system "have got it backwards.
Note: Receipt of cash does not always represent all of the interest income to be reported for Federal and state income tax purposes; amortization of bond discount
is also included.
Current GAAP requires that any bond discount
or premium be systematically amortized to income.
If P - F < 0, then the absolute value of D is equal to the bond discount
and it represents how much less the price of the bond is than its face value.
Temporary differences expected to arise in the future as a result of amortization of bond discount
or premium for financial reporting purposes should not be considered in the scheduling process.
Exhibit 5: Amortization of Bond Discount
Using the Interest Method * $400,000 of 9%, five-year bonds (semi-annual interest payments) sold to yield 10% at January 1, 2001.
Under the indirect method, cash flow from operations is derived by adjusting net income for: a) the effects of all deferrals of past operating cash receipts and payments, such as changes in inventories, deferred income, and the like, and all accruals of expected future operating receipts and payments, such as changes in operating receivables and operating payables; and b) the effects of revenues and expenses not involving cash, such as depreciation and goodwill amortization, bond discount
and premium amortization, as well as transactions whose cash effects are investing or financing cash flows, such as gains or losses from sales of plant and equipment or early extinguishments of debt.