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Worked-example setupScope and assumptions
- Cedar Trail Sensors, all instruments, dates, terms, classifications, prices, valuations, and accounting conclusions are fictional and supplied for instruction.
- The zero-coupon note pays $500,000 after three annual periods; an 8 percent annual market yield is supplied and there are no qualifying issuance costs.
- The equipment note begins at $300,000, bears 7 percent annual interest, and requires three equal annual payments in arrears.
- For the retired instrument, $612,400 is the supported net carrying amount immediately before retirement and $625,000 is attributable reacquisition consideration; the technical memorandum stipulates extinguishment.
- A separate amended instrument is stipulated to remain a modification; the example does not perform the authoritative scope test or establish the accounting for another exchange.
- Period
- Three-year note schedules and a fictional 2029 retirement date
- Units
- US dollars and annual periods
- Rounding
- Retain full precision in schedules; display dollars to cents
Pattern 1: zero coupon does not mean zero interest
The note's only contractual cash flow is $500,000 at the end of year 3.
issue price = $500,000 ÷ (1.08)^3 = $396,916.12
discount = $500,000 − $396,916.12 = $103,083.88
| Year | Opening carrying amount | Cash interest | Interest expense at 8% | Ending carrying amount |
|---|---|---|---|---|
| 1 | $396,916.12 | $0.00 | $31,753.29 | $428,669.41 |
| 2 | 428,669.41 | 0.00 | 34,293.55 | 462,962.96 |
| 3 | 462,962.96 | 0.00 | 37,037.04 | 500,000.00 |
Interest expense accretes the discount. The absence of coupon cash changes the cash column, not the existence of financing cost.
Pattern 2: equal payment is not equal principal
The $300,000 equipment note has a three-year, 7 percent level payment of $114,315.4997045.
| Year | Opening principal | Cash payment | Interest at 7% | Principal reduction | Ending principal |
|---|---|---|---|---|---|
| 1 | $300,000.00 | $114,315.50 | $21,000.00 | $93,315.50 | $206,684.50 |
| 2 | 206,684.50 | 114,315.50 | 14,467.92 | 99,847.58 | 106,836.92 |
| 3 | 106,836.92 | 114,315.50 | 7,478.58 | 106,836.92 | 0.00 |
The payment stays level. Interest declines with opening principal, so principal reduction rises. The three reductions total $300,000 at full precision.
Between-date cutoff remains a separate layer
Suppose a reporting date falls halfway through a coupon interval. The close accrues the elapsed coupon and effective-interest amounts for that interval, using the entity's supported time convention. It does not bury interest payable inside unamortized discount. Contractual interest cutoff and debt basis must remain separately reconcilable.
Supplied extinguishment: stop, reconstruct, compare
The technical memorandum stipulates that the old instrument is extinguished. The schedule stops immediately before the transaction and reconstructs its net carrying amount:
reacquisition consideration $625,000
less: net carrying amount removed (612,400)
loss on extinguishment $12,600
Dr Debt and related net basis $612,400
Dr Loss on debt extinguishment 12,600
Cr Cash $625,000
Face amount is neither reacquisition price nor the default comparison amount. The entry's detail accounts depend on the ledger components behind the supplied $612,400 net amount.
Modification, fair value, and maturity boundaries
A separate amendment is stipulated to continue the existing liability. It requires a new contractual cash-flow map and supported subsequent accounting; it does not reuse the old schedule unchanged. The FASB debt-exchanges project was paused in March 2026, so project materials are not substituted for current Topic 470.
A valid fair value option election and a contractual maturity disclosure have different inputs and purposes. A supplied fair value does not rewrite face amount. A maturity table reports contractual principal and then bridges discount, premium, issuance costs, and other applicable basis layers to the ledger. None of these arithmetic schedules establishes election eligibility, valuation support, own-credit presentation, classification, or disclosure compliance.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · debt effective interest analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- debt issues
- 1 field
Inspect data
{
"zero_coupon_note": {
"face_amount": 500000,
"issuance_costs": 0,
"market_annual_rate": 0.08,
"payments_per_year": 1,
"stated_annual_rate": 0,
"total_periods": 3
}
}- extinguishments
- 1 field
Inspect data
{
"retired_note": {
"net_carrying_amount": 612400,
"reacquisition_price": 625000
}
}- installment notes
- 1 field
Inspect data
{
"equipment_note": {
"annual_rate": 0.07,
"payments_per_year": 1,
"principal": 300000,
"total_periods": 3
}
}Recomputed result
| Measure | Value |
|---|---|
| equipment note ending carrying amount | 0 |
| equipment note period 1 interest expense | 21,000 |
| equipment note period 1 principal reduction | 93,315.4997 |
| equipment note periodic payment | 114,315.4997 |
| equipment note total interest expense | 42,946.4991 |
| retired note extinguishment gain | 0 |
| retired note extinguishment loss | 12,600 |
| zero coupon note gross discount | 103,083.8795 |
| zero coupon note issue price | 396,916.1205 |
| zero coupon note period 1 interest expense | 31,753.2896 |
| zero coupon note period 3 ending carrying amount | 500,000 |
| zero coupon note total interest expense | 103,083.8795 |