Premium on bonds payable is a counter account that enhances the value of bonds payable and is added to bonds payable in the long-term liabilities area of the balance sheet.
Is a counter account for bonds payable?
For example, if a corporation issues $100,000 in bonds that are receivable for $97,000, the bonds will be issued at a 3% discount rate. A $97,000 debit to Cash, a $100,000 credit to Bonds Payable, and a $3,000 debit to Discount on Bonds Payable will be included in the company’s entry. Because it is a liability account with a debit balance, the Discount on Bonds Payable account is a contra account.
What type of account is the bond premium payable?
A liability account with a credit balance for bonds payable that were issued at a price higher than their face or maturity value. The premium on payable bonds is deducted from interest expenditure over the bonds’ term, resulting in a reduction in interest expense. See Explanation of Bonds Payable for further information.
Is a bond premium payable a current liability?
The excess amount by which bonds are issued over their face value is known as premium on bonds payable. This is recorded as a liability on the issuer’s books and is amortized to interest expense throughout the bonds’ remaining life. This amortization has the net effect of lowering the amount of interest expenditure associated with the bonds.
When the market interest rate is lower than the bond’s stated interest rate, a premium is paid. Investors are willing to pay more for the bond in this situation, resulting in a premium. They will pay a higher interest rate in order to achieve an effective interest rate that is comparable to the market rate.
Is the payable bond discount a counter liability?
The difference between a bond’s face value and the decreased price at which it was sold by the issuer is known as the discount on bonds payable. When investors need to earn a greater effective interest rate than the bond’s stated interest rate, this occurs. The discount is held in a contra liability account, which is linked to and offsets the bonds payable account. The discount is amortized to interest expense throughout the remaining life of the bond, resulting in an increase in interest expense for the issuer over the bond’s life. As the discount is amortized over time, it shrinks in size until the bond is redeemed, when it approaches a zero balance.
What exactly is the problem with payables?
Contra asset accounts are set up with a credit balance, which reduces the asset’s balance. A liability with a debit balance is one that is utilized to reduce a responsibility’s balance. A discount on payable notes or bonds is an example of a contra liability. The balance of contra liabilities is negative.
Key Points
- When a bond is issued, the corporation must debit cash for the amount received, credit a bond payable liability account for the face value of the bonds, and credit a bond premium account for the difference between the sale price and the face value of the bonds.
- To determine the bond premium amortization rate, a corporation divides the bond premium amount by the number of interest payments that will be paid over the bond’s period.
- When the corporation records interest payments, it credits cash with the amount paid to the bond holder, debits the bond premium account with the amortization rate, and credits interest expense with the difference between the amount paid in interest and the premium’s amortization for the period.
- The corporation must pay the bondholder the face amount of the bond, finish amortizing the premium, and pay any remaining interest obligations when the bond reaches maturity. The bond premium and bond payable account must equal zero once all final journal entries have been made.
Premium on bonds payable quizlet is what type of account?
A bond issued at a price higher than its face (par) value is known as a premium, whereas a bond issued at a price lower than its face (par) value is known as a discount. The credit balance on Premium on Bonds Payable is positive, while the debit amount on Discount on Bonds Payable is negative.
In the financial statements, how should premiums on bonds payable be reported?
The premium or discount on bonds payable that has not yet been amortized to interest expense will be reflected in the liabilities section of the balance sheet immediately after the par value of the bonds. The amounts will be reported in the long-term or noncurrent liabilities column of the balance sheet if the bonds do not mature within one year of the balance sheet date.
Is the premium on bonds payable taken from the balance sheet’s bonds payable?
C. A premium on bonds payable is deducted from the bonds payable amount and shown on the balance sheet with long-term liabilities. B. A premium on bonds payable is added to the bonds payable balance and presented on the balance sheet with stockholders’ equity.
AccountDebitCreditCash100,000Financial Liability-Bonds100,000AccountDebitCreditCash100,000AccountDebitCreditCash100,000AccountDebitCreditCash100,000Account
You might question why we don’t discount the value of cash flow bonds that will be paid at the end of the third year. The present value ledger record of bond value and annual interest equals the par value when the coupon rate equals the effective interest rate. A credit to cash account for the amount of interest expenditure and a credit to discount on bonds payable for the amount of amortization are also available for a discount.
What exactly is a counter account?
- A contra account is a general ledger account that is used to lower the value of a connected account.
- They can be used to keep a primary account’s historical worth while displaying a decrease or write-down in a separate contra account that nets to the current book value.
- Contra accounts are usually found just below the corresponding account on the financial statement, with a third line showing the net amount.
- To keep financial accounting records clean, accountants create contra accounts rather than immediately reducing the value of the underlying account.
- Accumulated depreciation and provision for dubious accounts are two instances of contra accounts.