Amortization is the process of gradually reducing a bond premium or discount over the life of a bond. Your company issues a bond for a premium when it sells the bond for more than face value, which is the value it repays bondholders when the bond matures. It issues a bond for a discount when it sells it for less than face value. The amount of the discount or premium is the difference between the issue price and the face value. Your company must adjust your interest expense for amortization on the income statement and report the remaining balance of a premium or discount on the balance sheet.
Reporting Amortization of a Discount
Add the amount of annual amortization of a bond’s discount to the annual interest you paid to bondholders to calculate total annual interest expense. For example, assume you amortize a bond’s discount by $100 annually and pay $500 in annual interest. Add $100 to $500 to get $600 in total annual interest expense.
Report your result as a line item called “Bond interest expense” on your income statement annually until the bond matures. In this example, report “Bond interest expense $600.”
Subtract the annual amortization of the discount from the amount of unamortized discount on your balance sheet to calculate your unamortized discount remaining. Continuing with the example, assume you have yet to amortize $1,000 of the bond’s discount. Subtract $100 from $1,000 to get $900 in unamortized discount remaining.
Report your result as a line item called “Less unamortized discount” below the “Bonds payable” line item in the long-term liabilities section of your balance sheet. This amount reduces your total bonds payable. In this example, report “Less unamortized discount $900.” Reduce the unamortized discount by the annual amortization and report this line annually until the bond matures.
Reporting Amortization of a Premium
Subtract the annual amortization of a bond’s premium to the annual interest you paid to bondholders to calculate total annual interest expense. For example, assume you amortize a bond’s premium by $200 annually and pay $1,000 in annual interest. Subtract $200 from $1,000 to get $800 in total annual interest expense.
Report your result as “Bond interest expense” on your income statement annually until the bond matures. In this example, report “Bond interest expense $800.”
Subtract the annual amortization of the premium from the amount of unamortized premium on your balance sheet to calculate your unamortized premium remaining. Continuing with the example, assume you have yet to amortize $2,000 of the bond’s premium. Subtract $200 from $2,000 to get $1,800 in unamortized premium remaining.
Report your result as a line item called “Plus unamortized premium” below the “Bonds payable” line in the long-term liabilities section of your balance sheet. This amount increases your total bonds payable. In this example, report “Plus unamortized premium $1,800.” Reduce this amount by the annual amortization and report this line annually for the life of the bond.