Explain the amortization of a bond premium. Identify and describe the amortization methods available

Expert Solution

If a company issues bonds and investors pays more than the face value of such bonds then that excess amount will be treated as Premium and the company needs to amortize it over terms of the bond in order to close that premium account. Due to this amortization, the interest expense will be decreased by the company in its books. There are many methods available for amortization bonds but the main commonly used methods are -

a) Straight-Line Method - The premium is calculated by subtracting the face value of the bond from the purchase price and it is divided by the total number of periods of the bond. In simple words, it amortizes a fixed amount in each period over the life of the bond.

b) Effective Interest Method - This method uses the market interest rate of the bond based on the book value of the bond as the premium is amortized by multiplying the market interest rate by the book value of the bond.

ekkarill92 answered 1 month ago

how to create an amortization schedule for bonds that are sold at a premium ($1,000 bond...

how to create an amortization schedule for bonds that are sold at a premium ($1,000 bond is sold for more than $1,000). given facts about a bond sold at a premium, someone should be able to follow your instructions and produce an amortization schedule

E10-22 (Algo) Recording and Reporting a Bond Issued at a Premium (Straight-Line Amortization with Premium Account)...

E10-22 (Algo) Recording and Reporting a Bond Issued at a Premium (Straight-Line Amortization with Premium Account) LO10-5 On January 1 of this year, Victor Corporation sold bonds with a face value of $1,470,000 and a coupon rate of 9 percent. The bonds mature in four years and pay interest semiannually every June 30 and December 31. Victor uses the straight-line amortization method and also uses a premium account. Assume an annual market rate of interest of 8 percent. (FV of...

Question: In regard to a bond discount or premium, what is the effective-interest amortization method?

What methods are available to determine flow and flow in rivers. Explain with a paragraph. Describe...

What methods are available to determine flow and flow in rivers. Explain with a paragraph. Describe the three methods you will choose from these methods by explaining and exemplifying them in detail.

What are the two methods for recording amortization of bond premiums and discounts? Which is best?...

What are the two methods for recording amortization of bond premiums and discounts? Which is best? Why?

Journalize the issuance of the bonds payable and the payment of the first semiannual interest and amortization of the bond discount or premium.

Question: Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018. 6. Journalize the issuance of the bonds payable on January 1, 2018. 7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line amortization method) on July 1, 2018. 8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the first semiannual interest and amortization of...

Straight -line amortization of bond premium or discount Four Seasons issues $2,000,000 of 8 %, 4...

Straight -line amortization of bond premium or discount Four Seasons issues $2,000,000 of 8 %, 4 -year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $2,030,000. Required 1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance. 2. For each semiannual period, compute ( a ) the cash payment, (b) the straight-line premium or discount amortization, (c)the bond interest expense( d). Unamortized...

Briefly explain the following methods; the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method

Alpha Company uses the straight-line method for amortization of all bond premium & discounts. During fiscal...

Alpha Company uses the straight-line method for amortization of all bond premium & discounts. During fiscal year 2016 Alpha had the following bond payable transactions: January 2, issued ten, $1,000 bonds at 101 1/2. These 5-year bonds are dated January 1, 2016. The contract interest rate is 6%. Interest is payable semi-annual on January 1 and July 1. July 1, Alpha issued $500,000 of 10%, 10-year bonds. The bonds are dated January 1, 2016 were issued at 98 1/2, and pay interest...

Alpha company uses the straight-line method for amortization of all bond premium & discounts. During FY...

Alpha company uses the straight-line method for amortization of all bond premium & discounts. During FY 2016 Alpha had the following bond payable transaction: -January 2, issued 10, $1,000 bonds at 102 1/2. These 5-year bonds are dated January 1, 2016. The contract interest rate is 6%. Interest is payable semi-annual on January 1 and July 1. -July 1, Alpha issued $500,000 of 10%, 10-year bonds. These bonds are dated January 1, 2016, were issued at 88 1/2, and pay...

Question