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Amortizing Bond Premiu1 - amortization The entry...

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Amortizing Bond Premium Continuing our example, assume Candlestick Inc. sells the bonds described above for $102,000 rather than $98,000. This would result in a bond premium of $2,000 ($102,000 - $100,000). This premium results in an effective-interest rate of approximately 9.48%. (The effective-interest rate can be solved for using the techniques shown in Appendix C at the end of this book.) Illustration 10B-4 shows the bond premium amortization schedule. Illustration 10B- Bond premium amortization schedule For the first interest period, the computations of bond interest expense and the bond premium amortization are:
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Illustration 10B- Computation of bond premium amortization
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Unformatted text preview: amortization The entry Candlestick makes on December 31 is: Bond Interest Expense Premium on Bonds Payable Bond Interest Payable (To record accrued interest and amortization of bond premium) For the second interest period, interest expense will be $9,638, and the premium amortization will be $362. Note that the amount of periodic interest expense decreases over the life of the bond when companies apply the effective-interest method to bonds issued at a premium. The reason is that a constant percentage is applied to a decreasing bond carrying value to compute interest expense. The carrying value is decreasing because of the amortization of the premium....
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