Bond Premium with Effective Interest Rate Example: 5-year 9% $100,000 bond issued in an 8% market for $104,100 on January 1, 2017 Bond Assumptions: 1. The bond premium of $4,100 must be amortized to Interest Expense over the life of the bond. This amortization will cause the bond's book value to decrease from $104,100 on January 1, 2017 to $100,000 just prior to the bond maturing on December 31, 2021 2. The corporation must make an interest payment of $4,500 ($100,000 x 9% x 6/12) on each June 30 and December 31. This means that the Cash account will be credited for $4,500 on each interest payment date. 3. The effective interest rate method uses the market interest rate at the time that the bond was issued. In our example, the market interest rate on January 1, 2017 was 4% per semiannual period for 10 semiannual periods. 4. 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. 5. The difference between Item 2 and Item 4 is the amount of amortization. Use the effective interest Rate Method to Find the carrying value) Book Value of the Bond. D Date Interest Interest Payment Stated 4.5% x Face Amortization on Bond Premium (C-B) Credit Balance in Bond Expense Mkt 4% Previous BV In G Credit Balance in Bonds Payable Book Value of the Bond (F plus G) Premium Jan 1, 2017 $4,100 $100,000 $104,100 June 30, 2017 Dec. 31, 2017 June 30, 2018 Dec 31, 2018 June 30, 2019 Dec 31, 2019 June 30, 2020 Dec. 31, 2020 June 30, 2021 Dec 31, 2021 Totals-B,C,D ONLY Journalize Years 2017-2018 Jan. 1, 2017 June 30, 2017 Dec. 21, 2017 June 30, 2018 Dec. 31, 2018