Objective: To enhance the students knowledge of the FASB Codification and to practice communicating the results of the research in clear, complete and professional manner.

Background: Company Z is growing rapidly and needs about $40 million of additional capital to finance the expansion of its production capacity. During 2017, the Board of Directors and management agree to the issuance of $40,000,000 of 20 year bonds with stated interest of 4 %, paid semi-annually. The bonds were issued at an effective interest rate of 5% with a covenant requiring the maintenance of a debt to asset ratio of 60%.

Instructions: Answer the following questions. For each answer provide the appropriate references to the FASB Codification. Do NOT copy and paste the codification sections.

1. Explain what is an effective interest rate and how is it used in accounting for long-term debt.

2. Could the company use straight-line amortization of the discount and, if so, under what circumstances?

3. Describe how the company would classify their bond on the balance sheet and what disclosures would be necessary.

The question can be answered partially as i will fill move forward with including the FASB part unless there is a way to give access.