I'm having a hard time thinking these accounting entries through. Company has a convertible note that gets amortized. What entry am I missing here because the BS doesn't balance with what I have below??
with amort expense.....
P&L NI - down
CF NI - down Amort - add back cash impact is zero
BS Cash - flat Convert debt - down Retained Earnings - down
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Amortization refers to two different things that I think you might be confusing (1) the paying down of debt (principle) and (2) amortization that relates to asset value... I think you're talking about debt pay down which in this case your 'entries' wouldn't make sense as it would only impact the BS and the SCF primarily with maybe a reduction in interest expense impacting the P&L
Generally, the part that gets amortized relative to debt is the discount or premium, depending on the difference between face value and the cash collected. This difference (discount or premium) arises when market rates differ from the rate on the note. You have 3 scenarios:
1) Market rate = Note Payable rate; no discount or premium 2) Market rate Note Payable rate; premium, because note pays a higher rate than current market 3) Market rate > Note Payable rate; discount, because note pays a lower rate than current market
In scenario 2 and 3, GAAP says you have to amortize the discount or premium over the number of repayments.
Here is a detailed explanation of the entries related to notes payable. Note the difference between amortizing using straight line vs effective interest method. I don't think the fact that they are convertible bonds affects the amortization of discount or premium. The convertible piece is only relevant to your question in the event that conversion takes place (that's a unique set of entries that aren't asked for here).
http://www.cliffsnotes.com/study_guide/Bonds-Payable.topicArticleId-212…
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