With regards to bonds payable, the term amortize means to systematically allocate the discount on bonds payable, the premium on bonds payable, and the bond issue costs to Interest Expense over the remaining life of the bonds. … The most precise way to amortize these is to use the effective interest rate method.
What is Amortisation of bond discount?
Bond discount amortization is the process through which bond discount written off over the life of the bond. … This causes the bond to sell at a price lower than the face value of the bond and the difference is attributable to bond discount.
What happens when you amortize a bond premium?
When a bond is issued at a price higher than its face value, the difference is called Bond Premium. The issuer has to amortize the Bond premium over the life of the Bond, which, in turn, reduces the amount charged to interest expense. read more.
What does it mean when a bond is amortized?
An amortized bond is one in which the principal (face value) on the debt is paid down regularly, along with its interest expense over the life of the bond. A fixed-rate residential mortgage is one common example because the monthly payment remains constant over its life of, say, 30 years.
What is amortized premium?
A tax term, the amortizable bond premium refers to the excess price (the premium) paid for a bond, over and above its face value. The premium paid for a bond represents part of the cost basis of the bond, and so can be tax-deductible, at a rate spread out (amortized) over the bond’s lifespan. 1.
Why is there a need to amortize discount or premium?
Therefore, bond discounts or premiums have the effect of increasing or decreasing the interest expense on the bonds over their life. Under these conditions,it is necessary to amortize the discount or premium over the life of the bonds by using either the straight-line method or the effective interest method.
When a taxable bond is issued at a discount taxpayers are required to amortize?
(T/F) When a taxable bond is issued at a discount, taxpayers are required to amortize the discount and reduce the amount of interest reported in the current year by the amount of current year original issue discount amortization.
What is the effect of amortizing bond premium and bond discount on interest income?
The amount of the bond discount is amortized to interest expense over the bond’s life. As a bond’s book value increases, the amount of interest expense increases. The effective interest method considers the impact of the bond purchase price rather than accounting only for its par value or face value.
How do you record bond premium amortization?
Therefore, the amortization of the bond premium will involve the account Interest Expense. Each accounting period during the life of the bond there needs to be a credit to Interest Expense and a debit to Premium on Bonds Payable.
What is a premium bond?
What are Premium Bonds. Premium Bonds are an investment product issued by National Savings and Investment (NS&I). Unlike other investments, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win between £25 and £1 million tax free.
Is bond premium on tax-exempt bonds deductible?
If the bond yields tax-exempt interest, you must amortize the premium. This amortized amount is not deductible in determining taxable income. … As long as the bond is held to maturity, there will be no capital gain or loss associated with the bond.