Quick Answer: What Is The Effect Of Amortizing A Bond Premium?

What impact will the amortization of a bond premium have on reported interest expense?

When using the effective interest method, the debit amount in the discount on bonds payable is moved to the interest account.

Therefore, the amortization causes interest expense in each accounting period to be higher than the amount of interest paid during each year of the bond’s life..

What are the two methods of amortization of bonds discount premium?

If the company uses the amortized cost approach to measure a long-term debt, it can use two methods to amortize the discount and the premium: the effective interest rate method, or. the straight-line method (allowed only under U.S. GAAP).

Is Bond premium an asset?

Premium on bonds payable is the excess amount by which bonds are issued over their face value. This is classified as a liability, and is amortized to interest expense over the remaining life of the bonds. … In this case, investors are willing to pay extra for the bond, which creates a premium.

What is the formula for bond premium amortization?

First, calculate the bond premium by subtracting the face value of the bond from what you paid for it. Then, figure out how many months are left before the bond matures and divide the bond premium by the number of months remaining. That tells you how much to amortize on a monthly basis.

Do you have to amortize bond premiums?

If you buy a taxable bond selling at a premium, (i.e., for more than face value, or par) you have a couple of options on how to report the taxes on the bonds. However, if you buy a bond premium on a tax-exempt bond, you must amortize it using the constant-yield method.

How do you account for bond premium?

When the bond is issued, the company must debit the cash by the amount that the business receives, credit a bond payable liability account by an amount equal to the face value of the bonds, and credit a bond premium account by the difference between the sale price and the bond’s face value.

Why is the effective interest method preferred?

The effective interest method is preferable to the straight-line method of charging off premiums and discounts on financial instruments, because the effective method is considerably more accurate on a period-to-period basis.

Why do you amortize bond discount?

A bond discount occurs when an issuer sells a bond and receives proceeds from investors for less than the face value of the bond. By amortizing a bond discount, the amount of amortization for each period can be used to determine periodic interest expense, as well as the changing bond carrying value over time.

When a bond sells at a premium interest expense will be?

When a bond sells at a premium, interest expense will be: less than the bond interest payment. $285,500. On June 30, 2014, Prouty Co. had outstanding 9%, $5,000,000 face amount, 10-year bonds that pay interest semi-annually on June 30 and December 31.

What is a bond premium?

A premium bond is a bond trading above its face value or costs more than the face amount on the bond. A bond might trade at a premium because its interest rate is higher than the current market interest rates. The company’s credit rating and the bond’s credit rating can also push the bond’s price higher.

What does it mean to amortize a bond premium?

A tax term, the amortizable bond premium refers to the excess price (the premium) paid for a bond, over and above its face value. The premium paid for a bond represents part of the cost basis of the bond, and so can be tax-deductible, at a rate spread out (amortized) over the bond’s lifespan.

How is bond premium handled on tax return?

Subtract the bond premium amortization from your interest income from these bonds. Report the bond’s interest on Schedule B (Form 1040A or 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, print “ABP Adjustment,” and the total interest you received.

How do you find the premium on bonds payable?

The total bond premium is equal to the market value of the bond less the face value. For instance, with a 10-year bond paying 6% interest that has a $1,000 face value and currently costs $1,080 in the market, the bond premium is the $80 difference between the two figures.

What impact will bond premiums have on the calculation of interest expense?

The amount of the premium is recorded in a separate bond-related liability account. Over the life of the bonds the premium amount will be systematically moved to the income statement as a reduction of Bond Interest Expense.

Is a bond premium a debit or credit?

The entry to record the issuance of the bonds increases (debits) cash for the $11,246 received, increases (credits) bonds payable for the $10,000 maturity amount, and increases (credits) premium on bonds payable for $1,246.

What type of account is bond premium?

An unamortized bond premium is a liability for issuers as they have not yet written off this interest expense, but will eventually come due. On financial statements, unamortized bond premium is recorded in a liability account called the Unamortized Bond Premium Account.

What is the difference between bond premium and acquisition premium?

A Bond’s OID is the excess of the stated redemption price at maturity over the issue price. … The purchase of an OID Bond carries acquisition premium if the purchase price is (a) greater than the Bond’s adjusted issue price, but (b) less than or equal to the sum of all remaining payments excluding QSI.

How do you amortize a bond premium straight line?

To calculate cash interest, we multiply the face value of the bonds ($100,000) by the coupon rate (9%) to get $9,000. To calculate premium amortization, we take the amount of cash interest ($9,000) and subtract the interest expense ($8,536.81) to get premium amortization of $463.19.