In the case of the 9% $100,000 bond issued for $104,100 and maturing in 5 years, the annual straight-line amortization of the bond premium will be $820 ($4,100 divided by 5 years). We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping. However, when a corporation issues only annual financial statements, the amortization of the bond premium is often recorded at the time of its semiannual interest payments. In our example, the bond premium of $4,100 must be reduced to $0 during the bond's 5-year life. Please let us know how we can improve this explanation, Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. The difference, in this case, is a credit to the Premium Bonds account of $7,722. The bonds have a term of five years, so that is the period over which ABC must amortize the premium. ABC must then reduce the $100,000 premium on its bonds payable during each accounting period that the bonds are outstanding, until the balance in the Premium on Bonds Payable account is zero when the company has to pay back the investors. Account Types. If so, the issuing company must amortize the amount of this excess payment over the term of the bonds, which reduces the amount that it charges to interest expense. Investment in Bonds at a Premium general journal entry. There are two ways for ABC to amortize the premium. The entry to record this bond issue is: This entry is similar for recording bonds issued at a discount, except that a premium account is involved. The format of the journal entry for amortization of the bond premium is the same under either method of amortization - only the amounts change. After issuing the bonds at premium, the total interest expense incurred by the Valenzuela Corporation over the 5-year life of the bonds is $52,278, calculated as follows: Again, another way to view this is to consider what the company will ultimately repay the bondholders versus what it received at the time of issuance. You have two accounts to credit: bonds payable for the face amount of $100,000 and premium on bonds payable for $3,465, which is the difference between face and cash received at issuance. We know this is a discount because the price is less than 100%. Company Final Acounts Practical Problems and Solutions. Cash is debited for the entire proceeds, and Bonds Payable is credited for the bonds’ face amount. Below are the 12 monthly entries for the amortization plus the June 30 and December 31 payments of semiannual interest during the year 2019: The journal entries for the years 2020 through 2023 will be similar if all of the bonds remain outstanding. When a bond is sold at a premium, the amount of the bond premium must be amortized to interest expense over the life of the bond. ProfessorBDoug's Bond Premium Journal Entry For our example assume Jan 1 Carr issues $100,000, 12% 3-year bonds for a price of 105 1/4 or 105.25% with interest to be paid semi-annually on June 30 and December 30 for cash. Adjusting Journal Entry - To record Series 2019A Debit Credit Debt Service Fund Other financing source Proceeds From Bonds {6} 38,999.73 Debt Service Fund Other financing source Premium On Debt Issuance {8} 57,642.62 Debt Service Fund Asset Debt Service Checking {6 + 8} 96,642.35 Since this 9% bond will be sold when the market interest rate is 8%, the corporation will receive more than the bond's face value. The amount received for the bond (excluding accrued interest) that is in excess of the bond's face amount is known as the premium on bonds payable, bond premium, or premium. Are fast cash loans and personal loans right for you or your family? Credit. The bondholders arc receiving $6,000 ($100,000 x .06) every 6 months when comparable investments were yielding only 10% and paying $5,000 ($100,000 x .05) every 6 months. All rights reserved.AccountingCoach® is a registered trademark. This website's benefits have exceeded my expectations. In other words, if the bonds are a long-term liability, both Bonds Payable and Premium on Bonds Payable will be reported on the balance sheet as long-term liabilities. The following table shows how the bond's book value will decrease from $104,100 to the bond's maturity amount of $100,000: If monthly financial statements are issued, the straight-line amortization of the bond premium will be $68.33 per month ($4,100 of bond premium divided by the bond's life of 60 months). In other words, the credit balance in the account Premium on Bonds Payable must be moved to the account Interest Expense thereby reducing interest expense in each of the accounting periods that the bond is outstanding. The certificates include Debits and Credits, Adjusting Entries, Financial Statements, Balance Sheet, Income Statement, Cash Flow Statement, Working Capital and Liquidity, Financial Ratios, Bank Reconciliation, and Payroll Accounting. By the time the bonds reach maturity, their carrying value will have been reduced to their face value of $100,000. To show how to account for bonds issued at a premium, we wül now assume that on January 2, 2020, the Valenzuela Corporation issues $100,000, 5-year, 12% term bonds. Thus, ABC receives not only $10,000,000 for the bonds, but also an additional $100,000, which is a premium over the face value of the bonds. The bond premium of $4,100 was received by the corporation because its interest payments to the bondholders will be greater than the amount demanded by the market interest rates. Under this assumption the journal entries on June 30 and December 31 will be: The combination of the interest payments and the bond amortization results in the net amount of $8,180 ($4,500 of interest paid on June 30 + $4,500 of interest paid on December 31 minus $410 of amortization on June 30 and minus $410 of amortization on December 31). This calculation is shown below: The premium of $7,722 is amortized by using either the stralght=line method or the effective-interest method. The journal entry at July 1, 2020, and each interest payment date thereafter is: The effect of this and subsequent entries is to decrease the carrying value of the bonds as the premium account is reduced each period.
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