Are Premium Bonds worth investing in?
Premium Bonds have been offered by National Savings and Investments (NS&I) since 1957. They are a way of saving, without incurring risk, as NS&I are a part of the Government and are backed by HM Treasury. Interest is not earned on Premium Bonds, but a prize draw is held each month with payouts ranging from £25 to £1 million.
Should I put my savings into Premium Bonds?
With Premium Bonds there is no risk to your capital – so the money you put in is totally safe – it is only the 'interest' that is a gamble. And as Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury, this capital is as safe as it gets.
What does it mean when bonds are issued at premium?
In effect, the premium should be thought of as a reduction in interest expense that should be amortized over the life of the bond. The bonds were issued at a premium because the stated interest rate exceeded the prevailing market rate.
When a bond sells at a premium?
A premium bond is a bond whose current selling price on the open market is higher than its par (or stated) value. This situation arises when the stated interest rate on the face of the bond is higher than the market interest rate currently in existence.
Is premium on bonds payable a credit?
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 kind of account is 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.
Does bonds payable have a credit or debit?
debitThe account Discount on Bonds Payable (or Bond Discount or Unamortized Bond Discount) is a contra liability account since it will have a debit balance. Discount on Bonds Payable will always appear on the balance sheet with the account Bonds Payable.
Why is premium on bonds payable credited?
The premium on bonds payable account is called an adjunct account because it is added to the bonds payable account to determine the carrying value of the bonds.
How do you record premium on bonds payable?
If there was a premium on bonds payable, then the entry is a debit to premium on bonds payable and a credit to interest expense; this has the effect of reducing the overall interest expense recorded by the issuer.
What type of account is premium on bonds payable quizlet?
Premium on bonds payable is an adjunct account. For example, a company issues $300,000 of bonds at a price of $102; it will be issuing the bonds at premium of 2%.
How is a premium on bonds payable reported on the balance sheet?
The account Premium on Bonds Payable is a liability account that will always appear on the balance sheet with the account Bonds Payable. 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.
Which statement is true about a premium on bonds payable?
Answer and Explanation: It is true that a premium on bonds payable d) decreases when amortization entries are made until its balance reaches zero at the maturity date. The premium is tracked by both investors and issuers of bonds and it is a contra-liability account.
What is a Bond?
A bond is just a promise to pay another party two things; one, a set rate of interest on specific dates; and two, repay them their principal on maturity. Bonds don’t normally have early repayment options for holders, although of course the bond can normally be sold onto another buyer – with no involvement from the issuer.
What is a Premium on Bonds Payable?
A premium on a bonds issue arises when the interest rate being paid on the bond, referred to as the coupon rate, is higher than the equivalent market interest rate at the moment. Like the discount situation we looked at in our other article, this raises three issues we need to look at.
Journal Entry for Premium on Bonds Payable
Now to the fun bit, the debits and credits. We will look at four sections relating to a bond issue:
Conclusion
Although on the face of it the journal entry for a bonds payable premium looks straight forward enough, there is actually quite a lot involved. We covered what a bond is and what it might be used for. We then noted it was an adjunct account and the debits and credits involved.
What is premium on bonds payable?
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. If the amount received is greater than the par value, the difference is known as the premium on bonds payable.
When is discount on bonds payable reported?
The premium or the discount on bonds payable that has not yet been amortized to interest expense will be reported immediately after the par value of the bonds in the liabilities section of the balance sheet. Generally, if the bonds are not maturing within one year of the balance sheet date, the amounts will be reported in ...
What is the balance in a premium or discount account?
Hence, the balance in the premium or discount account is the unamortized balance.
What is the difference between a par value and a premium?
If the amount received is greater than the par value, the difference is known as the premium on bonds payable. If the amount received is less than the par value, the difference is known as the discount on bonds payable.
When are bonds reported on the balance sheet?
Generally, if the bonds are not maturing within one year of the balance sheet date, the amounts will be reported in the long-term or noncurrent liabilities section of the balance sheet.
What is an unamortized premium?
The unamortized premium on bonds payable will have a credit balance that increases the carrying amount (or the book value) of the bonds payable. The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable.
What Is A Bond?
What Is A Premium on Bonds Payable?
- A premium on a bonds issue arises when the interest rate being paid on the bond, referred to as the coupon rate, is higher than the equivalent market interest rate at the moment. Like the discount situation we looked at in our other article, this raises three issues we need to look at. First, why would a firm be paying above market interest rates? Second, how is the premium, whi…
Journal Entry For Premium on Bonds Payable
- Now to the fun bit, the debits and credits. We will look at four sections relating to a bond issue: 1. cash is received and bonds are issued: 2. first interest payment is paid to bond holders; 3. premium paid by bond holders is amortised;and 4. bonds are repaid at maturity. The example we will use is ABC Ltd and the debt funding it wishes to raise ...
Conclusion
- Although on the face of it the journal entry for a bonds payable premium looks straight forward enough, there is actually quite a lot involved. We covered what a bond is and what it might be used for. We then noted it was an adjunct account and the debits and credits involved. In particular, we worked through what was required to issue a bond, make the regular interest payments, how we …