Amortizable Bond Premium Overview, Bond Amortization Table

Majority of the bonds have early amortization characteristics for a specific date and price, and the premium bonuses amortize first to the call function. The remaining amortization is distributed at maturity, and the discount vouchers increase at maturity only. The amortization can be done equally in each accounting period up to the end of the bond’s life.

There are two methods for the same, which are discussed below. Based on your chosen method, you can amortize the bond premium in the books of accounts. The amount amortized each month must be booked as an amortizing a premium on bonds payable expense. It has to be done when bonds are issued at a premium above their face value. Then, the company issuing such bonds needs to write off the bond’s Premium over its life in the books of accounts.

What is the nature of the premium account?

The difference between the amount paid in interest and the premium’s amortization for the period is the interest expense for that period. The carrying value is a calculation performed by the bond issuer, or the company that sold the bond, in order to accurately record the value of the bond discount or premium on financial statements. The discount or premium is amortized, or spread out, over the term of the bond.

Companies do not always issue bonds on the date they start to bear interest. Regardless of when the bonds are physically issued, interest starts to accrue from the most recent interest date. Firms report bonds to be selling at a stated price “plus accrued interest.” The issuer must pay holders of the bonds a full six months’ interest at each interest date. Thus, investors purchasing bonds after the bonds begin to accrue interest must pay the seller for the unearned interest accrued since the preceding interest date. The bondholders are reimbursed for this accrued interest when they receive their first six months’ interest check.

What is Budgetary Accountability?

Each year, the premium of $800 will be amortized, and the carrying value of the bond will decrease by $800. By the end of the 5-year period, the carrying value of the bond will equal its face value of $100,000. But the bond premium has to be amortized for each period, and a reduction of cost basis in the bond is necessary each year. For the remaining 7 periods, we can use the same structure presented above to calculate the amortizable bond premium. It can be seen from the above example that a bond purchased at a premium has a negative accrual, or in other words, the basis of the bond amortizes. The effective interest rate is multiplied times the bond’s book value at the start of the accounting period to arrive at each period’s interest expense.