It is also the same as the price of the bond, and the amount of cash that the issuer receives. On maturity, the book or carrying value will be equal to the face value of the bond. Both of these statements are true, regardless of whether issuance was at a premium, discount, or at par.

The debit balance in the Discount on Bonds Payable account will gradually decrease as it is amortized to Interest Expense over their life. Although the borrower receives all of the funds at the time of the issue, the matching convention requires that it be recognized over the life of the bond. DebitCreditJan 1 Bonds Payable100,000Cash100,000Bonds Payable ($100,000 bond amount)100,000To record payment of bond at maturity. Moreover, the “payable” term signifies that a future payment obligation is not yet fulfilled.

SLA — Discount Bonds

When rates go up, bond market values goes down, and vice versa. To record these how to calculate premium on bonds payable amounts, bondholders should understand how to amortize a bond premium.

• When the bond is issued, the company must debit the cash account by the amount that the business receives for the bond sale.
• Bonds have a contract rate, that is the interest rate that is written on the face of the bond.
• Originating long-term bonds describe an important origin of investing or funding for any organization.
• However, the difference arises in the pace of interest expenses.
• A bond’s nominal yield, depicted as a percentage, is calculated by dividing all the annual interest payments by the face value of the bond.

The market rate is what other bonds that have a similar risk pay in interest. A bond’s coupon is the interest rate that the business must pay on the bond’s face value. These interest payments are generally paid periodically during the bond’s term, although some bonds pay all the interest it owes at the end of the period. As a result, the interest that is paid to the bond holder fluctuates over time with an indexed coupon rate. At any point in time the liability on the balance sheet will equal the present value of the remaining cash flow payments to the creditor discounted at the effective market interest rate. The term bonds issued at a premium is a newly issued debt that is sold at a price above par. When a bond is issued at a premium, the company typically chooses to amortize the premium paid by the straight-line method over the term of the bond.

Introduction to Business

For example, suppose your company issues a $1 million par value bond for $1.041 million that matures in 5 years. The bond pays 9 percent interest, or $4,500 semiannually, while the prevailing annual interest rate is only 8 percent. At issue, you debit cash for the $1.041 million sale proceeds and credit bonds payable for $1 million face value. You plug the $41,000 difference by crediting the adjunct liability account “premium on bonds payable.” SLA reduces the premium amount equally over the life of the bond.

In this example, you semi-annually debit the premium on bonds payable by the original premium amount divided by the number of interest payments, which is $41,000 divided by 10, or $4,100 per period. In the same transaction, you debit interest expense for $40,900 and credit interest payable or cash for $45,000. The effective interest method of amortizing the discount to interest expense calculates the interest expense using the carrying value of the bonds and the market rate of interest at the time the bonds were issued. For the first interest payment, the interest expense is $469 ($9,377 carrying value × 10% market interest rate × 6/ 12 semiannual interest). The semiannual interest paid to bondholders on Dec. 31 is $450 ($10,000 maturity amount of bond × 9% coupon interest rate × 6/ 12 for semiannual payment). The $19 difference between the $469 interest expense and the $450 cash payment is the amount of the discount amortized. The entry on December 31 to record the interest payment using the effective interest method of amortizing interest is shown on the following page.