Debt issue costs are classified as assets because of the matching principle. The idea is to match the cost of issuing debt to the periods that benefit from the debt. For example, if a corporation incurs $500,000 of issue costs associated with its 10 year bonds, it should expense $50,000 per year ($500,000 divided by 10 years).

To achieve the matching principle, the corporation must initially defer the issue costs. Deferred expenses or deferred costs or prepaid costs are reported as assets on the balance sheet. In the bond example above, at the time that the corporation pays for its bond issue costs, it will debit Deferred Issue Costs for $500,000 and will credit Cash for $500,000. Then in each of the 10 years of the bond's life it will credit Deferred Issue Costs for $50,000 and will debit Bond Issue Costs Expense for $50,000.

If the amount of the bond issue costs is not significant, the materiality concept allows the corporation to expense the entire amount of issue costs at the time that the bonds are issued.

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