Analyze Accounts to Separate Mixed Costs into Variable and Fixed Components
Scattergraph to Separate Mixed Costs into Variable and Fixed Components
Keeping the Accounting Equation in Balance

How to Record Bonds Issued at a Premium

When a bond is issued at a premium, its market value is more than its face value. To make the concept come alive for you, consider a common example you will see in your intermediate accounting textbook.

Imagine that, for $100,000, an investor is willing to accept an effective interest rate of 6 percent. Using the present value tables, the present value of a $100,000 bond is $79,209 ($100,000 x .79209). The present value of the interest payable is $24,256 ($7,000 x 3.46511). The following figure shows how to calculate the premium on this issuance.

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The journal entry to record this transaction is to debit cash for $103,465. You have two accounts to credit: bonds payable for the face amount of $100,000 and premium on bonds payable for $3,465, which is the difference between face and cash received at issuance.

The premium of $3,465 has to be amortized for the time the bonds are outstanding. Quick and dirty, for Year 1, cash paid is $7,000, interest expense is $6,208 ($103,465 x .06), and the premium amortized is $792 ($7,000 – $6,208). For Year 2, cash paid remains $7,000, interest expense is $6,160 [(103,465 – 792) x .06], and the premium amortized is $840 ($7,000 – $6,160).

And so on for Years 3 and 4.

Corporations raise money to purchase assets in one of two ways: debt or equity.

Oddly enough, debt can end up making a company money. This is called financial leverage, and it takes place when the borrowed money is expected to earn a higher return than the cost of interest payable on the debt. Additionally, interest expense on debt is a tax deduction, whereas dividends payable to investors are not.

Based on many factors that combine advanced financial accounting and finance, the company may also end up in a better position due to the decrease in taxes payable.

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