The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Subject: Financial Accounting
Bond Premium with Straight Line mortization
What is bond premium?
When a corporation makes provisions to issue or sell a bond to its investors, it may predict that the proper interest rate will be 7%. In case, investors agree to accept 7% rate of interest, then the bond will sell for its face value. But in case the market interest rate is less than 7%, the corporation will get more than actual face amount of the bond. The sum received for the bond (apart from the rate of interest) which is more than the
bond’s face amount is called bond premium.
Premium on Bonds Payable with Straight-Line Amortization
Over the bond’s life span, balance in account
premium for bonds payable needs to be minimized to 0. For example, bond premium of $3500 must be reduced to $0 during its 5 year life. By reducing it to $0, the book value of the book will be lessened from $ 103,500 on January 1, 2014 to $100,000 when the bonds mature on December 31, 2018. Reduction of the bond in a precise, systematic manner is known as amortization. The bond premium of $3500 was acquired by the corporation as its interest rate to bondholders will be more than the actual amount demanded by market rates of interest. So, amortization of bond premium will include account interest exp
ense. All accounting periods during the bond’s life need to debit to
premium on b
payable and credit to interest expense.