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Premium on Bonds quiz #1

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  • What does it mean when bonds are issued at a premium, and how is the initial journal entry recorded?
    Bonds are issued at a premium when the stated interest rate is higher than the market rate, causing the bonds to sell for more than their face value. The initial journal entry debits cash for the total amount received, credits bonds payable for the face value, and credits premium on bonds payable for the difference between the cash received and the face value.
  • How is the premium on bonds payable amortized using the straight-line method, and what effect does this have on interest expense and the carrying value of the bonds?
    The premium is amortized by dividing the total premium by the number of interest payment periods, reducing the premium account with each payment. This decreases the carrying value of the bonds over time and lowers the interest expense reported on the income statement compared to the cash interest paid.
  • When are bonds issued at a premium?
    Bonds are issued at a premium when the stated interest rate is higher than the market rate, making the bonds more attractive to investors.
  • How do you calculate the cash received when bonds are issued at a premium?
    The cash received is calculated by multiplying the face value of the bonds by the premium percentage (e.g., face value × 1.08 for 108%).
  • What is the initial journal entry for issuing bonds at a premium?
    The entry debits cash for the total amount received, credits bonds payable for the face value, and credits premium on bonds payable for the difference between cash received and face value.
  • How is the premium on bonds payable amortized using the straight-line method?
    The total premium is divided by the number of interest payment periods, and this amount is debited from the premium account with each interest payment.
  • What effect does amortizing the premium have on the carrying value of the bonds?
    Amortizing the premium reduces the carrying value of the bonds over time, bringing it closer to the face value by maturity.
  • How does the premium amortization affect interest expense on the income statement?
    The amortization of the premium lowers the interest expense reported on the income statement compared to the cash interest paid.
  • What journal entry is made at the end of an accounting period if interest has accrued but not yet been paid?
    A debit is made to interest expense and premium on bonds payable, and a credit is made to interest payable for the accrued interest amount.
  • What is the final journal entry when the principal of the bonds is repaid at maturity?
    The entry debits bonds payable for the face value and credits cash for the same amount, eliminating the liability from the books.