58 - $4,164 Premium on Bonds Payable $336 Cash($100,000 x...

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Interest Expense on Bonds Issued at a Premium The company pays interest based on only the face value even though it received more than face value. Interest Expense = Carrying Amount of Bond x Market Interest Rate Premium is amortized (reduced) over the bond term. Recording Interest on Bonds Issued at a Premium Referring to the previous example, interest expense on July 1 would be recorded as follows: Interest expense is debited for the carrying amount x market rate x 1/2 Cash is credited for the face value x stated rate x 1/2 Premium is debited for the difference between the expense and payment Date Accounts Debit Credit 1-July Interest Expense (104,100 x 4%)
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Unformatted text preview: $4,164 Premium on Bonds Payable $336 Cash ($100,000 x 4.5%) $4,500 Retiring Bonds Before Maturity • Interest rates may change causing companies to retire bonds early Borrowing rates may become less than interest rate on bonds • Some bonds are callable Company can pay off bonds a specific price Convertible bonds • Bondholders may exchange bonds for company’s stock • Offers investor: Assured receipt of interest and principal on bonds Opportunity for gains on stock Investors will accept a lower interest rate on bonds because of the attractiveness of this feature....
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