Bonds Payable

Let’s calculate the amortization for the first period and second period. Assume XYZ Corp. sells $100,000 worth of five-year bonds with a semiannual coupon of 5%, or 10% per year. Investors think the company is risky, so they demand a 12% yield to maturity for buying these bonds. Just as we would see say in the straight-line method in the depreciation of a fixed asset, the amount of premium amortised each interest period, and therefore each year, is the same. Once the first journal entry is prepared for the premium on bonds payable it can just be repeated each period until maturity.

This means that the corporation will be required to make semiannual interest payments of $4,500 ($100,000 x 9% x 6/12). Notice that the effect of this journal is to post the interest of 4,249 to the interest expense account. In our example, there is no accrued interest at the issue date of the bonds and at the end of each accounting year because the bonds pay interest on June 30 and December 31. The entries for 2023, including the entry to record the bond issuance, are shown next. Following on from our article that looked at the discount side, in today’s accounting tutorial series we look at the journal entry and calculations required when a premium on a bonds payable issue is paid. In particular, we will look at how a premium arises, how it is calculated, the journal entries and how to amortise the premium over the life of the bond.

Bond Amortization Calculator Download

Each period the interest expense (4,249) is the interest paid to the bondholders based on the par value of the bond at the bond rate (4,800) less the premium amortized (551). However, bond premiums and discounts do not how to calculate premium on bonds payable apply to this scenario often. The first is when an issuer charges a lower price for their bonds than the face value. Like the premium bond, the bond discount can also relate to bonds trading at lower than face value.

For 20X1, interest expense can be seen to be roughly 5.8% of the bond liability ($6,294 expense divided by beginning of year liability of $108,530). For 20X4, interest expense is roughly 6.1% ($6,294 expense divided by beginning of year liability of $103,412). The systematic allocation of the discount, premium, or issue costs of a bond to expense over the life of the bond. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

Discount on Bonds Payable with Straight-Line Amortization

An unamortized bond premium is booked as a liability to the bond issuer. On an issuers balance sheet, this item is recorded in a special account called the Unamortized Bond Premium Account. This account recognizes the remaining amount of bond premium that the bond issuer has not yet amortized or charged off to interest expense over the life of the bond. To illustrate the discount on bonds payable, let’s assume that in early December 2022 a corporation prepares a 9% $100,000 bond dated January 1, 2023.

• Since a bond’s discount is caused by the difference between a bond’s stated interest rate and the market interest rate, the journal entry for amortizing the discount will involve the account Interest Expense.
• This discount will be removed over the life of the bond by amortizing (which simply means dividing) it over the life of the bond.
• If the investors are willing to accept the 9% interest rate, the bond will sell for its face value.
• As we mentioned in our discount on bonds accounting tutorial, we have a whole article dedicated to the effective interest method and the detail behind it; that article can be found here.
• For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• Below the table in the notes there is a explanation of what each column does.