Bonds Issued at a Premium

Concept

Why a Premium?

When the bond's stated rate exceeds the market rate, investors pay more than face value. The premium represents a reduction of interest cost over the bond's life.

Example

Issuance Entry

A company issues $100,000 of 10-year, 8% bonds when the market rate is 6%. The bonds sell for $114,720. Entry: Debit Cash $114,720, Credit Bonds Payable $100,000, Credit Premium on Bonds Payable $14,720.

Key Point

Carrying Value

Carrying Value = Face Value + Unamortized Premium. As the premium is amortized, carrying value DECREASES toward face value. Discount on Bonds Payable is a CONTRA-LIABILITY. Premium on Bonds Payable is an ADJUNCT-LIABILITY.

Bonds Issued at a Discount

Effective Interest Method

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