GAAP requires that any premium that is received on the issuance of debt securities be amortized as an adjustment of interest expense over the life of the debt. Explain briefly the tax treatment of premium that is received on the issuance of debt securities.

Question

Quizplus · Accepted Answer

The Answer is If the debt issuer is in the money lending business, the premium will have to be taken into income when the bonds are issued. For most other issuers, the premium will be treated as a tax free capital receipt, with no further tax consequences at the maturity of the bond. If, however, it appears that the bonds were deliberately priced to create a premium, the premium will have to be amortized as a reduction in interest expense over the life of the bonds.

GAAP Requires That Any Premium That Is Received on the Issuance