If the company uses the **amortized** cost approach to measure a long-term debt, it can use **two methods** to **amortize** the **discount** and the **premium**: the effective interest rate **method**, or. the straight-line **method** (allowed only under U.S. GAAP).

**Click to see complete answer. Besides, what is the amortization of premium on bonds payable?**

The **amortization** of the **premium on bonds payable** is the systematic movement of the amount of **premium** received when the corporation issued the **bonds**. The **premium** was received because the **bonds**‘ stated interest rate was greater than the market interest rate.

One may also ask, how do you record bonds issued at a premium? If there was a **premium** on **bonds** payable, then the entry is a debit to **premium** on **bonds** payable and a credit to interest expense; this has the effect of reducing the overall interest expense **recorded** by the issuer.

**Besides, what is the difference between the effective interest method and the straight line method when amortizing either a discount or a premium?**

**In** short, the **effective interest rate method** is more logical than the **straight**–**line method** of **amortizing** bond **premium**. The **effective interest rate** is multiplied times the bond’s book value at the start of the accounting period to arrive at each period’s **interest** expense.

## Where is premium on bonds payable on balance sheet?

The account **Premium on Bonds Payable** is a liability account that will always appear on the **balance sheet** with the account **Bonds Payable**. In other words, if the **bonds** are a long-term liability, both **Bonds Payable** and **Premium on Bonds Payable** will be reported on the **balance sheet** as long-term liabilities.

Is Bond premium an asset?

**Premium** on **bonds** payable is the excess amount by which **bonds** are issued over their face value. This is classified as a liability, and is amortized to interest expense over the remaining life of the **bonds**.

### Why do we amortize bond premium?

For a **bond** investor, the **premium** paid for a **bond** represents part of the cost basis of the **bond**, which is important for tax purposes. If the **bond** pays taxable interest, the bondholder can choose to **amortize** the **premium**â€”that is, use a part of the **premium** to reduce the amount of interest income included for taxes.

### Does Bond premium amortization reduce interest income?

If the **bond** yields taxable **interest**, you **can** choose to **amortize** the **premium**. This generally means that each year, over the life of the **bond**, you use a part of the **premium** to **reduce** the amount of **interest** includible in your **income**. This **amortized** amount is not deductible in determining taxable **income**.

### What is the effective interest method?

The **effective interest method** is the **method** used by a bond buyer to account for accretion of a bond discount as the balance is moved into **interest** income or to amortize a bond premium into an **interest** expense.

### What type of account is premium on bonds payable?

A **liability** account with a **credit** balance associated with bonds payable that were issued at more than the face value or maturity value of the bonds. The premium on bonds payable is amortized to interest expense over the life of the bonds and results in a reduction of interest expense.

### How do you find the effective interest rate on a discounted loan?

**Here’s the calculation:**

- Effective Rate on a Simple Interest Loan = Interest/Principal = $60/$1000 = 6%
- Effective rate on a Loan with a Term of Less Than One Year = $60/$1000 X 360/120 = 18%
- Effective rate on a discounted loan = $60/$1,000 – $60 X 360/360 = 6.38%

### Why is the effective interest method preferred?

**Interest**Earned

It is considered preferable to the straight-line **method** of figuring premiums or discounts as they apply to bond issues because it is a more accurate statement of **interest** from the beginning to the end of a chosen accounting period (the amortization period).

### How do you calculate straight line interest?

To **calculate** the **interest** for each period, simply divide the total **interest** to be paid over the life of the bond by the number of periods, be it months, quarters, years or otherwise. For most term bank debt like mortgages or installment loans, the **straight**–**line** method is very simple.

### When the effective interest method of bond discount amortization is used?

Therefore, the **amortization** causes **interest** expense in each period to be greater than the amount of **interest** paid during each year of the **bond’s** life. For example, assume a 10-year $100,000 **bond** is issued with a 6% semi-annual coupon in a 10% market. The **bond** is sold at a **discount** for $95,000 on January 1, 2017.

### What is Bond premium?

A **premium bond** is a **bond** trading above its face value or in other words; it costs more than the face amount on the **bond**. A **bond** might trade at a **premium** because its interest rate is higher than current rates in the market.

### What is the straight line method of amortization?

The **straight**–**line amortization method** is the simplest way to **amortize** a bond or loan because it allocates an equal amount of interest over each accounting period in the debt’s life. The **straight line amortization** formula is computed by dividing the total interest amount by the number of periods in the debt’s life.

### Is Bond premium taxable income?

If you pay a **premium** to buy a **bond**, the **premium** is part of your basis in the **bond**. If the **bond** yields **taxable** interest, you can choose to amortize the **premium**. If the **bond** yields tax-exempt interest, you must amortize the **premium**. This amortized amount is not deductible in determining **taxable income**.