Premium on bonds payable

Definition

Premium on bonds payable occurs when bonds are issued for more than their face value. This typically happens when the stated interest rate of the bond is higher than the prevailing market interest rate.

5 Must Know Facts For Your Next Test

1. Premium on bonds payable is recorded as a credit in accounting entries.
2. The premium on bonds payable account is amortized over the life of the bond using methods such as straight-line or effective-interest method.
3. Amortizing the premium decreases interest expense over time, aligning it with actual interest payments made to bondholders.
4. Upon issuance, cash received equals the face value plus the premium amount.
5. At maturity, only the face value of the bond is repaid to bondholders; any remaining premium should be fully amortized.

Review Questions

Related terms

Face Value:

The principal amount of a bond that is paid back at maturity.

Market Interest Rate:

The rate of return demanded by investors in the marketplace for owning similar risk and maturity instruments.

Amortization:

The process of gradually writing off the initial cost of an asset over its useful life.