After the Entry,the bonds would be included in the long-term liability section of the balance sheet as follows: The premium on bonds payable is amortized to interest expense over the life of the bonds and results in a reduction of interest expense. Answer Save. Premium on Bonds Payable is a contra account to Bonds Payable.? The issuing company can choose to expense the entire amount of the discount or can handle the discount as an asset to be amortized. C. Total liabilities increase by the amount of the credit to bonds payable. All rights reserved.AccountingCoach® is a registered trademark. He is the sole author of all the materials on AccountingCoach.com. 1 Answer. 37. This question hasn't been answered yet Ask an expert. What is the difference between restoration and recovery? C. Patents. contra account definition. b. has a debit balance. QUESTION 1 The premium on bonds payable is a contra liability account. • Premium on Bonds Payable is an adjunct account to Bonds Payable. C) It increases when amortization entries are made until it reaches its maturity value. c. is a contra account. B) is a contra account. Relevance. Some people might use the term adjunct accounts for both the Discount on Bonds Payable … Accounting for stock premiums is simple. D. Accumulated depreciation. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. Premium on bonds payable is a contra liability account. A) It is a contra-stockholders' equity account. c. is considered to be a reduction in the cost of borrowing. B) It is an account that appears only on the books of the investor. Debit Bond Issue Costs for $1 million. True False When a company issues bonds, the bond premium on bonds payable account will be considered as an adjunct account. The illustration below shows the balance sheet disclosure as of June 30, 20X3. The account Premium on Bonds Payable is a liability account that will always appear on the balance sheet with the account Bonds Payable. The debit balance in this account will be amortized to bond interest expense over the life of the bonds and results in more interest expense than interest paid. Premium on bonds payable is the excess amount by which bonds are issued over their face value. A premium on bond payable or a discount on bond payable The discount on bond payable account is a Contra-Liability account and therefore has a normal debit balance The account Premium on Bonds Payable is a liability account that will always appear on the balance sheet with the account Bonds Payable. Contra account. Show transcribed image text. This account typically appears within the long-term liabilities section of the balance sheet, since bonds typically mature in more than one year. The difference between the price we sell it and the amount we have to pay back is recorded in a contra-liability account called Discount on Bonds Payable. For example, the account Unamortized Premium on Bonds Payable (or simply Bond Premium) is an adjunct account since its credit balance is added to the amount in Bonds Payable in determining the book value of the bonds. The premium or discount on bonds payable is the difference between the amount received by the corporation issuing the bonds and the par value or face amount of the bonds. B) is a contra account. C) is considered to be a reduction in the cost of borrowing. c. debited to a deferred charge account and amortized over the life of the bonds. Copyright © 2021 AccountingCoach, LLC. Question: Premium On Bonds Payable Is A Contra Account To Bonds Payable. Breaking Down Unamortized Bond Discount The discount refers to the difference in the cost to purchase a bond (it's market price) and its par, or face value. A contra account is an account that is deducted on another account, and has a normal balance that is opposite to its related account. © AskingLot.com LTD 2021 All Rights Reserved. Read more about the author. Equity Account. Correspondingly, what type of account is premium on bonds payable? If the market interest rate is greater than the contractual interest rate, bonds will sell a. at a premium. c. at a discount. The debit balances in these accounts are amortized or allocated to Interest Expense over the life of the bonds or notes. D) is deducted from bonds payable on the balance sheet. Bonds payable are a form of long term debt usually issued by corporations, hospitals, and governments. Click to see full answer. This is classified as a liability, and is amortized to interest expense over the remaining life of the bonds. The most common contra liability accounts are Discount on Bonds Payable, Bond Issue Costs, Debt Issue Costs, and Discount on Notes Payable. Premium on bonds payable (or bond premium) occurs when bonds payable are issued for an amount greater than their face or maturity amount. A. Example of Adjunct Account. We always record Bond Payable at the amount we have to pay back which is the face value or principal amount of the bond. D) It decreases when amortization entries are made until its balance reaches zero at the maturity date. The retrained (should be retained) earnings is an amount of money that the firm is setting aside to pay stockholders is case of a sale out or buy out of the firm. In other words, if the bonds are a long-term liability, both Bonds Payable and Premium on Bonds Payable will be reported on the balance sheet as long-term liabilities. Similarly, how is premium on bonds payable shown on the balance sheet? Premium on bonds payable is a contra account to bonds payable that increases its value and is added to bonds payable in the long-term liability section of the balance sheet. The Discount on Bonds Payable a. is a miscellaneous revenue account b. is a contra account to Bonds Payable c. is expensed at the bond's maturity d. is an expense account e. has a normal credit balance What is the normal balance of the account premium on bonds payable? It is so because its credit balance will be included in the bonds payable account. false. false. Discounts on bonds. At the time, the market rate is lower than 8%, so investors pay $1,100 for the bond, rather than its $1,000 face value. C) is considered to be a reduction in the cost of borrowing. Example of Premium on Bonds Payable. Which of the following is true of a premium on bonds payable? Premium on bonds payable is a contra account to bonds payable that increases its value and is added to bonds payable in the long‐term liability section of the balance sheet. The Discount on Bonds Payable account is a contra account because it is a liability account with a debit amount. The entry eliminates the $9,800 book value of the bonds from the accounts by debiting Bonds Payable for $10,000 and crediting Discount on Bonds Payable for $200 (remember, discount on bonds payable is a contra-liability account and has a normal debit balance). An account with a balance that is the opposite of the normal balance. What is unearned sales revenue in accounting. TRUE/FALSE Premium on bonds payable is a contra liability account. O Contra Asset Account. Immediately after the bonds are issued, the bonds will have a carrying value of $306,000 ($300,000 PLUS $6,000). b. is a contra account. Normally I wouldn't post for help but I am on a time crunch and stuck closing at work. The entry to record the issuance of the bonds is: Debit Cash for $98.5 million. Bonds payable that mature (or come due) within one year of the balance sheet date will be reported as a current liability if the issuer of the bonds must use a current asset or will create a current liability in order to pay the bondholders when the bonds mature. The current market rate of interest is 11%. 1. Premium on bonds payable. Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 35. d. is deducted from bonds payable on the balance sheet. Premium on bonds payable is reported on the balance sheet as a contra-liability account. d. is considered to be a reduction in the cost of borrowing. What are the names of Santa's 12 reindeers? Premium on Bonds Payable a. has a debit balance. When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts. Unearned revenue is money received from a customer for work that has not yet been performed. true or false: premium on bonds payable is a contra liability account. Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. Contra Liability Account: A liability account that is debited in order to offset a credit to another liability account. Credit Bonds Payable for $100 million. The premium on bonds payable account is shown on the balance sheet as. A contra asset. true or false: bonds will sell for a premium when the market rate of interest exceeds their stated rate. A reduction of an expense. B. Unearned revenue. Premium on bonds payable definition bond issued at premium accounting detailed with balance sheet cliffs notes. A subtraction from a long-term liability. I think from the text that only discount on bonds payable is a contra account, but not positive. The normal balance of the Premium on Bonds Payable is a credit, and it is added to the Bonds Payable account to determine the carrying amount. Bonds payable. If the amount received is greater than the par value, the difference is known as the premium on bonds payable. For example, a bond with a stated interest rate of 8% is sold. discount on bonds payable definition. Total liabilities increase by the amount of the debit to cash. The contra accounts cause a reduction in the amounts reported. Issuing Bonds Payable at a Premium Smart Touch Learning issues its 9%, five-year bonds when the market interest rate is 8%. Expert Answer . • An adjunct account is an account that is directly related to another account. A liability account with a credit balance associated with bonds payable that were issued at more than the face value or maturity value of the bonds. What is premium on bonds payable on balance sheet? These bonds will sell at a price that is: A Equal to … Any help or guidance is appreciated. A contra liability account that reports the amount of unamortized discount associated with bonds that are outstanding. Premium on Bonds Payable A) has a debit balance. b. is a contra account. What does BPI certified compostable mean? This is caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds. The premium on bonds payable is amortized to interest expense over the life of the bonds and results in a reduction of interest expense. Here is where the term adjunct account is used. b. at face value. True False QUESTION 2 A bond issue with a face amount of $500,000 bears interest at the rate of 10%. In other words, if the bonds are a long-term liability, both Bonds Payable and Premium on Bonds Payable will be … Why is the Huang He River so important to China? The excess $100 is classified as a premium on bonds payable, and is amortized to expense over the remaining 10 year life span of the bond. false An implicit or imputed rate of interest must be used when long-term notes are issued at a stated rate of interest that is materially different from the market rate of interest. An addition to a long-term liability. b. reported as a reduction of the bond liability. Do you need footings for a timber frame extension? A valuation account is one that is needed to value properly the item to which it relates. The retained earnings is not an asset because it is considered a liability to the firm. Contra Revenue Account. A premium indicates the value of the shares and the market's expectations for the company. 2. The effective interest method is a technique for calculating the actual interest rate in a period based on the amount of a financial instrument's book value at the beginning of the accounting period. The issuer of bonds makes a formal promise/agreement to pay interest usually every six months (semiannually) and to pay the principal or maturity amount at a specified date some years in the future. Adjunct Liability Account. It is contrary to contra account where discounts offered on bonds payable would lower the amount in liability account. To illustrate the premium on bonds payable, let's assume that a corporation prepares to issue bonds with a maturity amount of $10,000,000 and a … a. has a credit balance. D) is deducted from bonds payable on the balance sheet. What is internal and external criticism of historical sources? A bond with a stated interest rate of 8% is sold. Question: The Premium On Bonds Payable Account Is A(n): Multiple Choice Revenue Account. Debit Bond Discount for $0.5 million. Which of the following is a contra account? Since a credit balance is the normal balance for a liability account, the account Premium on Bonds Payable cannot be referred to as a contra account. 10-26 Discount on Bonds Payable: Question Helpful Hint Both a discount and a premium account are valuation accounts. Premium on Bonds Payable: A) has a debit balance. d. The common stock account is used to record the par value of the stock issued and a separate account called paid-in capital in excess of par is used to record the premium. Premium on Bonds Payable is a contra account to Bonds Payable. On any given financial statement date, Bonds Payable is reported on the balance sheet as a liability, along with the unamortized Discount that is subtracted (known as a “contra” account). D. The credit to bonds payable is the amount reported as a … Decreases the book value of the account. The premium on bonds payable is amortized to interest expense over the life of the bonds and results in a reduction of interest expense. A liability account with a credit balance associated with bonds payable that were issued at more than the face value or maturity value of the bonds. To learn more, see Explanation of Bonds Payable. c. is added to bonds payable on the balance sheet. Unearned revenue is a liability for the recipient of the payment, so the initial entry is a debit to the cash account and a credit to the unearned revenue account. premium on bonds payable definition A liability account with a credit balance associated with bonds payable that were issued at more than the face value or maturity value of the bonds. B. Premium on bonds payable is a. a contra account. To determine. d. increases over the term of the bonds. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. What is the purpose of the macromolecule lab? Considering this, is premium on bonds payable an asset? 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