Course Outline
Join PRO

What is the amortization of premium on bonds payable?

Author:
Harold Averkamp, CPA, MBA

Definition of Amortization of Premium on Bonds Payable

The amortization of the premium on bonds payable is the systematic movement of the amount of premium received when the corporation issued the bonds. The premium was received because the bonds’ stated interest rate was greater than the market interest rate.

The amount of the premium is recorded in a separate bond-related liability account. Over the life of the bonds the premium amount will be systematically moved to the income statement as a reduction of Bond Interest Expense.

Example of Amortization of Premium on Bonds Payable

Assume that a corporation issues bonds payable having a maturity value of $1,000,000 and receives a premium of $60,000. The bonds mature in 20 years and there was no accrued interest at the time the bonds are issued.

The corporation will record the bonds as follows:

  • Debit Cash for $1,060,000 (the amount received from investors)
  • Credit Bonds Payable for $1,000,000 (the face, par, and maturity amount)
  • Credit Premium on Bonds Payable for $60,000 (the amount to be amortized)

Since the premium of $60,000 is related to the interest rates when the bonds were issued, the amortization of the premium will involve the account Interest Expense or Bond Interest Expense. Since the bonds mature in 20 years, the $60,000 of premium on bonds payable will mean an annual amortization of $3,000 ($60,000/20 year). The entry for the annual amortization will be the following:

  • Debit Premium on Bonds Payable for $3,000
  • Credit Interest Expense for $3,000

Reducing the balance in the account Premium on Bonds Payable by the same amount each period is known as the straight-line method of amortization. A more precise method, the effective interest rate method of amortization, is preferred when the amount of the premium is a large amount.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus