Page 605 - Accounting Principles (A Business Perspective)

15. Long-term financing: Bonds

Discount and premium amortization schedules A discount amortization schedule (Exhibit 120) and a
premium amortization schedule (Exhibit 121) aid in preparing entries for interest expense. Usually, companies
prepare such schedules when they first issue bonds, often using computer programs designed for this purpose. The
companies then refer to the schedules whenever they make journal entries to record interest. Note that in each
period the amount of interest expense changes; interest expense gets larger when a discount is involved and smaller
when a premium is involved. This fluctuation occurs because the carrying value to which a constant interest rate is
applied changes each interest payment date. With a discount, carrying value increases; with a premium, it
decreases. However, the actual cash paid as interest is always a constant amount determined by multiplying the

bond's face value by the contract rate.
Recall that the issue price was USD 95,233 for the discount situation and USD 105,076 for the premium
situation. The total interest expense of USD 40,767 for the discount situation in Exhibit 120 is equal to USD 36,000
(which is six USD 6,000 payments) plus the USD 4,767 discount. This amount agrees with the earlier computation
of total interest expense. In Exhibit 121, total interest expense in the premium situation is USD 30,924, or USD
36,000 (which is six USD 6,000 payments) less the USD 5,076 premium. In both illustrations, at the maturity date
the carrying value of the bonds is equal to the face value because the discount or premium has been fully amortized.

Adjusting entry for partial period Exhibit 120 and Exhibit 121 also would be helpful if Carr must accrue
interest for a partial period. Instead of a calendar-year accounting period, assume the fiscal year of the bond issuer
ends on August 31. Using the information provided in the premium amortization schedule (Exhibit 121), the
adjusting entry needed on 2010 August 31 is:
2010
Aug. 31 Bond interest expense ($5,254 x (2/6)) 1,751
Premium on bonds payable ($746 x (2/6)) 249
Bond interest payable ($6,000 x (2/6)) 2,000
To record two months' accrued interest.

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