1. Chapter 17 Part 2 – Bonds Payable Bond Premiums
2. Issuing Bonds at a Premium Premium on Bonds Payable is an account used when bonds are issued at a value greater than 100% of par.
It is an adjunct (also called accretion) liability account which is added to the par value of the bonds to produce the carrying (or book) value of the bonds.
3. Issuing Bonds at a Premium Both the face value of the bond and the premium are shown on the balance sheet presentation.
The book value of the bonds at the date of issue is always equal to the cash price of the bonds.
4. Issuing Bonds at a Premium Interest payments are calculated on the face value of the bond, not the cash received for them.
Example:
On January 1, 2003, XYZ Corporation issues $100,000 par value bonds for cash of $108,983, bearing interest of 6% for the bond term of five years. Interest is paid semi-annually.
5. Issuing Bonds at a Premium Balance Sheet Presentation:
6. Amortizing Bond Premiums The bond premium calculated must be amortized over the life of the bond.
Don’t forget accrual if the interest period and accounting period do not coincide.
Also accrue the amortization of the bond premium.
7. Amortizing Bond Premiums There are two methods to amortize the premium:
Straight-Line Method
Effective Interest Method
8. Straight-Line Method The interest expense for each period is the same for each payment made throughout the life of the bond.
The amortization of the premium is therefore the same.
9. Straight-Line Method The total interest expense over the life of the bond needs to be determined in order to calculate the expense and amortization for each period.
Interest expense from prior example is:
10. Straight-Line Method Amortization Table Do Quick Study 17-27 to 17-29 now.Do Quick Study 17-27 to 17-29 now.
11. Effective Interest Method Interest expense decreases as the bond matures because it is based on the carrying value of the bond.
The carrying value of the bond decreases as the premium is amortized.
12. Effective Interest Method Amortization Table Assume market interest rate is 4%:
13. Bond Premiums
Questions?
14. Assignment Hints Exercises:
17-18 c) Ending Balance Dec 31/06 $40,745
17-20 b) Carrying Value Oct 1/09 $752,599
17-21 c) Bond Interest Expense $37,987
17-22 b) Carrying Value Oct 1/09 $775,050
17-23 c) DR Premium on Bonds Payable $8,705
15. Assignment Hints Problems:
17-8A
Ending Balance Dec. 31/07 $80,730
17-10A
$27,823
Bond B – Gain on retirement $14,918
