Table 16-4
Parson Products Inc. purchased $186,000, 10%, five-year bonds to hold until maturity. The bonds were purchased on July 1, 2017 at market value which was 103, and will mature on July 1, 2022. Interest payment dates are June 30 and December 31. Parson uses the straight-line method to amortize any bond discount or premium.
-Refer to Table 16-4.The journal entry at December 31 to record the amortization of the premium will include:

Question

Quizplus · Accepted Answer

To amortize the premium, we need to calculate the premium amortization per period. 
Premium = Purchase Price - Face Value = $186,000 x 103% - $186,000 = $4,980
Premium Amortization per period = Premium / Number of periods = $4,980 / 10 = $498

The interest revenue recognized on December 31 will be for 6 months, and it is calculated as Face Value x Interest Rate x Time = $186,000 x 10% x 6/12 = $9,300.

Therefore, the journal entry to record the amortization of the premium is:
Debit: Interest Receivable $9,300
Credit: Interest Revenue $558
Credit: Premium on Bond Investment $498

The credit to Interest Revenue is only for the interest revenue recognized in the period, which is $558.

Table 16-4 Parson Products Inc. Purchased $186,000, 10%, Five-Year Bonds to Hold