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Sec valuation -Bonds
AFM
Hello sir, In illustration 34 of the chapter, why was the tax impact not given for cash cost of 425000(floating cost)
Answers (3)
shivaji hari
because Bond have life of 25 years , due to matching concept , this should be amortized Remaining period of 25 years
When a Bond has a life of 25 years, the matching concept dictates that its remaining period of 25 years should be amortized. This means that every year, we should recognize an expense equal to the portion of the bond that has been used up, which in this case is 1/25th of the original value. However, when calculating the tax benefit, we should only consider the portion of the expense that is deductible in the current year, which is 40% of the amortization expense (6800= 425000/25*40%). Therefore, in the 0th year, we should show an expense of 425,000 without any tax benefit. The tax benefit will be realized in future years as a deduction against taxable income.
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