Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 469

The entry to record the first interest payment on June 30, 2007, and the related dis-

count amortization is as follows:

If the amortization is recorded only at the end of the year, the amount of the dis-

count amortized on December 31 would be $550. This is the sum of the first two semi-

annual amortization amounts ($266 and $284) from Exhibit 17.

Amortization of Premium by the Interest Method

To illustrate the interest method for amortizing bond premiums, we assume the fol-

lowing data from the chapter illustration of issuing $100,000 bonds at a premium:

Present value of bonds at effective (market) rate of interest of 11% $103,769

Face value of 12% five-year bonds, interest compounded semiannually 100,000

Premium on bonds payable $ 3,769

Using the interest method to amortize the above premium yields the amortization

table in Exhibit 18. You should note the following items in this table:

1. The interest paid (Column A) remains constant at 6% of $100,000, the face amount
   of the bonds.


2. The interest expense (Column B) is computed at 5–^12 % of the bond carrying amount
   at the beginning of each period. This results in a decreasing interest expense each
   period.

AB CDE

Interest Paid Interest Expense Premium Unamortized Bond Carrying

Interest (6% of (5^1 – 2 % of Bond Amortization Premium Amount

Payment Face Amount) Carrying Amount) (A B) (D C) ($100,000 D)

$3,769 $103,769

1 $6,000 $5,707 (5^1 – 2 % of $103,769) $293 3,476 103,476

2 6,000 5,691 (5^1 – 2 % of $103,476) 309 3,167 103,167

3 6,000 5,674 (5^1 – 2 % of $103,167) 326 2,841 102,841

4 6,000 5,656 (5^1 – 2 % of $102,841) 344 2,497 102,497

5 6,000 5,637 (5^1 – 2 % of $102,497) 363 2,134 102,134

6 6,000 5,617 (5^1 – 2 % of $102,134) 383 1,751 101,751

7 6,000 5,596 (5^1 – 2 % of $101,751) 404 1,347 101,347

8 6,000 5,574 (5^1 – 2 % of $101,347) 426 921 100,921

9 6,000 5,551 (5^1 – 2 % of $100,921) 449 472 100,472

10 6,000 5,526 (5^1 – 2 % of $100,472) 472* — 100,000

* Cannot exceed unamortized premium.

Exhibit 18

Amortization of Premium on Bonds Payable

2007

June 30 Interest Expense 6,266

Discount on Bonds Payable 266

Cash 6,000

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