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Premium Bond Issuance and Amortization Guide

The document provides an example of accounting for bonds issued at a premium. Evermaster Corporation issued $100,000 face value bonds with an 8% coupon rate but investors required a 10% yield. This created a $8,530 premium which was recorded as a discount on bonds payable that would be amortized over the life of the bonds using the effective interest method. Semiannual interest payments and discount amortization amounts are provided in a schedule. Calling bonds early results in calculating loss on extinguishment based on carrying amount versus call price.

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ibrahim mohamed
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204 views3 pages

Premium Bond Issuance and Amortization Guide

The document provides an example of accounting for bonds issued at a premium. Evermaster Corporation issued $100,000 face value bonds with an 8% coupon rate but investors required a 10% yield. This created a $8,530 premium which was recorded as a discount on bonds payable that would be amortized over the life of the bonds using the effective interest method. Semiannual interest payments and discount amortization amounts are provided in a schedule. Calling bonds early results in calculating loss on extinguishment based on carrying amount versus call price.

Uploaded by

ibrahim mohamed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Corporation 11

Bonds Issued at a premium


Example:-

Evermaster Corporation issued $100,000 of 8 percent term bonds on January 1, 2020, due on
January 1, 2025, with interest payable each July 1 and January 1.

the investors required an effective-interest rate of 6 percent


solution
Maturity value of bonds payable 100,000
Present value of principle 74.409
Principle x P.V. $1 (n=5 i=3%)
100,000 X 0.74409

Present value of interest payable 34,121


Interest x P.V.O.A (n=5 i=3%)
(100000 x 8% x 6/12) = 4000 X 8.53020

proceeds from sale of bonds 108,530


= Discount on bonds payable 8530

Schedule of Bond Discount Amortization


Effective Interest Method- Semiannual Interest Payments
5 year, 8% bonds to yield 10%
Date Cash Interest Discount Carrying
Paid Expense Amortized amount
of Bonds
1/1/20 92,278
7/1/20 4000a 3256 744 107,786

1/1/21 4000 3234 766 107,020


7/1/21 4000 3211 789 106,231
1/1/22 4000 3162 813 105,418
7/1/22 4000 3137 838 104,580
1/1/23 4000 3112 863 103,717
7/1/23 4000 3085 888 102,829
1/1/24 4000 3187 915 101,914
7/1/24 4000 3057 943 100,971
1/1/25 4000 3029 971 100,000
Corporation 12

Masterwear (Issuer) United (Investor)

(Jan. 1) Cash 108530 Investment in bonds 100,000

premium on bonds 8530 premium in bond invest 8530

Bond payable 100,000 Cash 108530

July 1, interest expense 3256 Cash 4000

premium on bond 744 Premium on bond 744

Cash 4000 invest 3256

interest revenue

Dec 1, interest expense 3234 Interest receivable 4000

premium on bond 766 Premium on bond inve 766

interest payable 4,000 interest revenue 3234

Jan. Interest payable 4,000 Cash 4,000

Cash 4,000 Interest receivable 4,000

Maturity Bonds payable 100,000 Cash 100,000

Cash 100,000 Investment in bonds 100,00

Example ‫علي المسأله السابقه‬

On January 1, 2023, Masterwear industries called its $100,000, The indenture specified a call price of $105,000.

Bonds Payable 100,000


Loss on early extinguishment ‫متمم‬ 1283
Premium on bond payable (100,000 – 103,717) 3717 105,000
Cash
Corporation 13

Example

On January 1, 2013, Masterwear industries called its $700,000, 12% bonds when their carrying amount was

$676,288. The indenture specified a call price of $685,000.

The bonds were issued previously at a price yield 14%

Bonds Payable 700,000

Loss on early extinguishment ‫متمم‬ 8712

Discount on bond payable (700,000 – 676,288) 23,712

Cash 685,000

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