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For both bond premiums and discounts, the company will have to make an initial journal entry when the bonds are sold that records the cash received and the discount or premium given. In both cases, bonds payable will be credited for the total face value of the bonds.  Using the previous example, with the company issuing $200,000 bond would record a $200,000 credit to Bonds Payable. If the company sells the bonds with a $2,000 discount, the company would debit the cash account for the cash received, $198,000 ($200,000 - $2,000) and debit Discount on Bonds payable for the amount of the discount, $2,000.  Similarly, if the company sells the bonds with a $2,000 premium, the company would debit the cash account for cash received, which would total $202,000 ($200,000 + $2,000). They would also credit Premium on Bonds Payable for the amount of the premium, $2,000. When the next entries are made, the company will have to determine how much of the premium or discount to amortized. This amount will reduce the balance of either the discount or premium on bonds payable. If they are using straight-line depreciation, this amount will be equal for every reported period. For simplicity, we still stick to using this method in the example.  Imagine that for our example $200,000 bond issue, the bond makes a coupon payment twice per year, or every six months. This means that we will make two entries per year that record interest expense. Additional entries must be made at the same time for the proper amount of amortization of premiums or discounts.  Because it is a 5-year bond payable semi-annual payment, we will amortize one-tenth of the premium or discount in each period (5 years x twice per year). For our $2,000 premium or discount, this means recording $200 amortization each time. In order to properly report amortization, we will also need the know the amount of interest expense paid to bondholders over the same period. This is the amount of the coupon payment, based on a percentage of the par value. It is made in annual or semiannual payments to bondholders. Calculate annual interest expense by multiplying the coupon rate, or interest rate, by the par value of the bond. Divide this number by two to get the semiannual interest expense. For the example $200,000 bond, the interest expense would be found by multiplying the coupon rate, 10%, by the par value, $200,000. This gives $20,000. Therefore, the semi-annual interest expense recorded would be half of that, or $10,000. For each year, the company must record any interest expense paid incurred from the sale and maintenance of bonds. This includes both the coupon payments made to bondholders plus or minus the premium or discount amortization. For semiannual payments, the company would record both interest payments made within the year separately, along with their respective amortizations.  This is recorded with a debit to interest expense for the total interest expense, which is either the semiannual interest payment plus the amortization on the discount or minus the amortization on the premium. For a discount, there are also a credit to cash account for the amount of interest expense and a credit to discount on bonds payable for the amount of the amortization. These are entered equally for both semiannual payments. For a premium, there are also a debit to premium on bonds payable for the amount of the premium amortization and a credit to the cash account for the amount of the interest payment, For example, using the aforementioned $200,000 bond sale and a discount, we would recognize the $10,000 semiannual interest payment plus the $200 discount amortization as a debit to interest expense for a total of $10,200. We would also credit discount on bonds payable for $200 and credit the cash account for $10,000.
Make the initial entry at the date of bond sale. Calculate how much of the premium/discount will be amortized. Calculate interest expense. Record discount/premium amortizations on annual statements.