Premium Amortization On the first day of the fiscal year, a company issues an $7,200,000, 10%,...
Premium Amortization
On the first day of the fiscal year, a company issues an $7,200,000, 10%, 9-year bond that pays semiannual interest of $360,000 ($7,200,000 × 10% × ½), receiving cash of $7,637,760.
Journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.
| Interest Expense | |||
| Premium on Bonds Payable | |||
| Cash |
Homework Answers
Given, The Company issues a 9 year bond 10% , $7,200,000 for $7,637,760. Interest paid semi-annually.
Calculation of Ammortization of Premium on Bonds
It means it Involves the premium amount of $7,637,760 - $7200,000 = $437,760.
Such Premium amount on bond should be ammortized over the period of the bond.
I am using the straight line method for the ammortization of bond, whihc will be equal for all the interest payment periods.
Bond Premium Ammortization = Premium Value of the Bond / Totla no.of Interest Payments
= $437,760 / (9*2)
= $437,760 / 18
Bond Premium Ammortization = $24,320
The Journal Entry for first interest payment and the amortization of the related bond premium is as follows
| Particulars | Debit | Credit |
| Interest Expense ($360,000 - $24,320) | $335,680 | |
| Premium on Bonds Payable | $24,320 | |
| Cash | $360,000 |
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