The interest rate paid on the face amount of a bond is called the contract rate of interest. The interest rate paid on similar risk bonds is called the market rate of interest. When the market rate of interest is less than the contract rate of interest, the bonds will sell for more than  their face value. The difference between the selling price and the face amount of the bonds in this case is called a premium .

Feedback

When a bond is issued at a discount, the proceeds at issuance will be less than the face value of the bond.
When a bond is issued at a premium, the proceeds at issuance will be more than the face value of the bond.

Understanding the Business Transaction

On January 1, 2014 Jill Company issued the following bonds maturing on December 31, 2023:

Face Value	Contract Rate	Market rate	The bonds will sell at:
$4,480,000	12%	8%	a premium

If the contract rate of interest is greater than the market rate of interest, the bonds will sell for more  than their face value because the bond will pay more  interest than a buyer could earn on similar risk bonds issued by another company.

Feedback

The cash interest paid on a bond is calculated by multiplying the face value times the contract rate of interest and dividing that result by 2.

Recording in the Accounting System

On January 1, 2014, Jill Company issued the $4,480,000,12%, 10-year bonds described above for cash of $5697708. Journalize the issuance of the Jill Company bonds.

If an amount box does not require an entry, leave it blank.

	Cash
	Premium on Bonds Payable
	Bonds Payable

Feedback

When a bond is issued at a premium, the proceeds at issuance will be greater than the face value of the bond.

Financial Statement Impact

On July 1, 2014 Guinard Company issues $1,000,000, 10%, bonds payable due in 10 years. Click here and use the slider to select the relevant interest rate to answer the following questions.

1.a.	If the market rate of interest is 8%, what is the selling price of the bonds payable?
	$

b.	If the market rate of interest is 8%, what is the premium on the bonds payable?
	$

c.	If the market rate of interest is 8%, what is the carrying amount of the bonds payable on the date of issuance?
	$

d.	If the contract rate of interest is higher than the market rate of interest, the bonds will sell for more than  their face value.

2.a.	If the market rate of interest is 6%, what is the selling price of the bonds payable?
	$

b.	If the market rate of interest is 6%, what is the premium on the bonds payable?
	$

c.	If the market rate of interest is 6%, what is the carrying amount of the bonds payable on the date of issuance?
	$

d.	If the contract rate of interest remains constant, the amount of the premium when the bond is issued will increase  as the market rate of interest decreases.