Answer to Question #179402 in Accounting for Milan

Question

Debit Premium

Credit Interest Expense

• What does this journal entry mean?

Answer 1

The journal entry is to amortize bonds payable. The amortization of the premium on bonds payable is the systematic movement of the amount of premium received when the corporation issued the bonds. The premium was received because the bonds' stated interest rate was greater than the market interest rate. Thus the premium contains a debit to the balance sheet account Premium on Bonds Payable and a credit to the income statement account Bond Interest Expense.

Since the premium is a gain or receipt you debit and interest is paid which is cash out is credited.