When a company issues a bond, it receives cash for the issuance. When a bond is issued at a premium, the company receives more cash than the face value of the bond. A bond investor can pay a premium for the bond because the interest rate associated with the bond is above the market rate. Issuing the bond creates a liability for the company because it is obligated to make semi-annual interest payments, and to repay the principal amount of the bond. The balance in the premium on bonds payable account can be determined by tracking credit and debit entries in the general journal.
1. Confirm the number of credits to the "premium on bonds payable" account. View the general journal to determine the amount of bonds issued at a premium during the current accounting cycle. For example, assume a company has credits totaling $6,325 in the “premium on bonds payable” account. This illustrates the company has collected $6,325 in premiums on bond issuances for the current accounting period.
2. Verify the debit amounts to the “premium on bonds payable account.” Determine the amount of total debits to the account by viewing the general journal. Assume a company has debits equaling $3,250 in the “premium on bonds payable” account. In this case, the company has amortized $3,250 of the $6,325 “premium on bonds payable.”
3. Subtract the debit amount in the “premium on bonds payable” account from the credit amount to determine the balance in the “premium on bonds payable” account. Subtract $3,250 from $6,325 which equals $3,075. This represents the portion of the bonds premium that has yet to be amortized.
Items you will need
- General Journal
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