Bond Premium on Issuance
Definition: Issue price above face value
Scope:NarrowDifficulty:Difficult
Issue price above face value
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Issue at premium | ||
| Issue $500,000 bonds for $515,000. | ||
| CashAsset+ | $515,000 | |
| Bonds PayableLiability+ | $500,000 | |
| Premium on Bonds PayableLiability+ | $15,000 | |
| Market rate < coupon rate; investors pay more. | ||
| 2. Amortize premium (straight-line) | ||
| 10 semi-annual periods: $15,000 / 10 = $1,500. | ||
| Premium on Bonds PayableLiability− | $1,500 | |
| Interest ExpenseExpense+ | $13,500 | |
| CashAsset− | $15,000 | |
| Premium reduces interest expense below coupon. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
CashAsset account. Debits increase the balance. Credits decrease the balance.AssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$515,000.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$15,000.00
$500,000.00
Bonds PayableBonds PayableLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$500,000.00
Normal bal. ▶
$500,000.00
Premium on Bonds PayablePremium on Bonds PayableLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$1,500.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$15,000.00
Normal bal. ▶
$13,500.00
Interest ExpenseExpense account — cost of borrowing money. Debits increase the balance. Credits decrease the balance.ExpenseA cost incurred in the process of earning revenue. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$13,500.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$13,500.00
DurationLong-Term
External Links
- Bond (finance)#Bond premium — Wikipedia