Question

Which of the following is stated correctly?

1. Current liabilities follow non-current liabilities on the statement of financial position under GAAP, but non-current liabilities follow current liabilities under IFRS.
2. IFRS does not treat debt modifications as extinguishments of debt.
3. Bond issuance costs are recorded as a reduction of the carrying value of the debt under GAAP but are recorded as an asset and amortized to expense over the term of the debt under IFRS.
4. Under GAAP, bonds payable is recorded at the face amount and any premium or discount is recorded in a separate account. Under IFRS, bonds payable is recorded at the carrying value so no separate premium or discount accounts are used.

Short answer

The correct option is(d) Under GAAP, bonds payable is recorded at the face amount, and any premium or discount is recorded in a separate account. Under IFRS, bonds payable is recorded at the carrying value, so no separate premium or discount accounts are used.

Step-by-step solution

Definition of Bonds Payable

Bonds payable is a liability account reported by the business unit to reflect the number of bonds issued by the business entity. This is reported in the non-current section of the balance sheet.

Explanation for the correct option

Option (d) is correct because the business entity reporting under IFRS does not reflect discounts and premiums on the balance sheet. Rather the bonds are reported at the net amount. While business entity reporting under GAAP reports discount and premium in a separate account.

Explanation for Incorrect options

1. Option (a) is incorrect because, under GAAP, the assets and liabilities are reported in the order of liquidity, i.e., most liquid followed by less liquid. Under IFRS, the reverse order is followed, i.e., less liquid first and most liquid.
2. Option (b) is incorrect because under IFRS, debt terms are modified are considered a debt extinguishment.
3. Option (c) is incorrect because the issuance cost of bonds is capitalized under GAAP, and under IFRS, it is deducted from the carrying value of the bonds.