By Elizabeth A. Minbiole
Semesters of accounting are required through such a lot enterprise, economics, finance, and actuarial technology courses ñ- and on normal, there are a few 700,000 scholars taking accounting every year! Are you one among them? CliffsQuickReview Accounting rules II offers every little thing you must fast comprehend complex accounting fundamentals ñ- from budgeting to price accounting.
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31 Interest Expense ($11,246 × 10% × 6 ⁄ 12) Debit Credit 562 Premium on Bonds Payable Cash ($10,000 × 12% × ⁄ 12 ) 6 38 600 Pay semiannual interest using interest method of amortization As the premium is amortized, the balance in the premium account and the carrying value of the bond decreases. The amount of premium amortized for the last payment is equal to the balance in the premium on bonds payable account. As with the straight-line method of amortizing the premium, the effective interest method of amortizing the premium results in the premium account’s balance being zero at the maturity of the bonds such that the carrying value of the bonds will be the same as the their principal amount.
This difference occurs because the definition of income is not the same under GAAP (generally accepted accounting principles) and federal income tax regulations. GAAP requires income tax expense to be calculated on income before taxes on the income statement while the tax return calculates taxes due based on taxable income per the income tax return. If the differences are considered temporary, in other words, if certain revenues and/or expenses are reported in different years in income statements and on income tax returns, an asset or liability called deferred income tax exists.
It is calculated by multiplying the $11,246 (carrying value of the bonds) times 10% (market interest rate) × 6 ⁄ 12 (semiannual payment). The amount of interest paid is $600 ($10,000 face value of bonds × 12% coupon interest rate × 6 ⁄ 12 semiannual payments). The $38 of premium amortization is the difference between the interest expense and the interest paid. The entry to record the first interest payment on December 31 using the effective interest method of amortizing the premium would be: General Journal Date Account Title and Description Ref.
Accounting Principles II by Elizabeth A. Minbiole