amortization of bond premium
Subtract the bond premium amortization from your interest income from these bonds. Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, print “ABP Adjustment,” and the total interest you received. In the case of a taxable bond, if the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to the accrual period, the excess is treated by the holder as a bond premium deduction under section 171(a)(1) for the accrual period. Bond Premium with Straight-Line Amortization. When a corporation prepares to issue/sell a bond to investors, the corporation might anticipate that the appropriate interest rate will be 9%. If the investors are willing to accept the 9% interest rate, the bond will sell for its face value. An amortized bond is used specifically for tax purposes because the amortized bond discount is treated as part of a company's interest expense on its income statement. The interest expense, a nonoperating cost, reduces a company's earnings before tax (EBT) and, therefore, the amount of its tax burden. Interest payment frequency: This determines amortization intervals. Set this to annual for zero coupon bonds. Interest coupon payment date type: For example, regular semi-annual payment dates for a first coupon date of Feb 1 would be Feb 1 and Aug 1. Anything else would be odd payment dates. Therefore, the amortization of the bond premium will involve the account Interest Expense. Each accounting period during the life of the bond there needs to be a credit to Interest Expense and a debit to Premium on Bonds Payable. In this section we will illustrate the straight-line method of amortization. § 1.171-2 Amortization of bond premium. (a) Offsetting qualified stated interest with premium—(1) In general. A holder amortizes bond premium by offsetting the qualified stated interest allocable to an accrual period with the bond premium allocable to the accrual period. Premium on Bonds Payable with Straight-Line Amortization. Over the life of the bond, the balance in the account Premium on Bonds Payable must be reduced to $0. In our example, the bond premium of $4,100 must be reduced to $0 during the bond's 5-year life. What is an 'Amortized Bond'. An amortized bond is a financial certificate that has been reduced in value for recording on financial statements. An amortized bond is one where the discount amount being amortized becomes part of its interest expense over the life of the bond. (ii) Amount of bond premium. The interest payments on the bond are qualified stated interest. Therefore, the sum of all amounts payable on the bond (other than the interest payments) is $100,000. Under § 1.171-1, the amount of bond premium is $10,000 ($110,000−$100,000).
The amortization of the bond premium will involve the account Interest Expense. Each accounting period during the life of the bond there needs to be a credit to Interest Expense and a debit to Premium on Bonds Payable. In this section we will illustrate the straight-line method of amortization.