 In this presentation, we will calculate an amortization schedule under the effective method for a premium. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. We're going to have our information on the left. We'll enter that into our worksheet here. Then we'll post a couple transactions based on that information so we can see what it's actually used for why we're doing it. And then we'll post that to a trial balance so we can see the effect on a trial balance on actual accounts. So if we go back to the left here, this is going to be the information we have face amount of the bond 100,000 stated rate the amount on the actual bond 12% market rate something less 10% that's why we issued that a premium and rather than a discount and then their semi annual we pay every two set every six months two times a year and two year bond meaning it has two years and we pay every six months or four time periods for six month time periods. The issue price is going to be 103,546 which of course is greater than the face amount the difference between the two being the premium that we're issuing it over and above. Now if we go to the to the trial balance just to see this in context and what would it look like on the trial balance. We issued it for the sum of these two 103,546 that's how much cash we got when we issued the bond. We put the bond on the books as a liability of the 100,000 that's what we owe at the end of the bond term and then we've got this premium which is what we got over and above what we're going to pay back at the end of the bond term. When we make interest payments we're going to actually make an interest payment that doesn't really cut into the principal that's what's stated as interest on the bond. So we're not going to reduce the bond payable as we make interest payments but we have to do something to this premium that's got to go away somehow. We could there's two methods we could make this go down and remember what it's there for it's a result of the difference between the market rate and the stated rate on the bonds. So it's really interest it's a result of interest so we're going to reduce this and post it to interest expense in some way. One way we can do it is just to take this amount and divide it by the number of periods for two years two times a year and just take a straight method and allocate it out evenly. That would be the easiest thing to do that'd be similar to like a straight line depreciation method but it's not the most proper method so the preferred method is the effective method which is kind of similar to the to calculating a loan amortization schedule where we're going to take the carrying amount and figure out how much the interest expense should be based on that and so that means that the amount that will be allocated will differ and that's what we'll use here. So if we go back to the left first we'll just look at the straight line method to compare and then we'll go to the effective method. So the straight line method we would just say the unamortized premium would be the 100,000 minus the 103,546 or vice versa and the carrying amount then will be the 100,000 plus the unamortized premium and then we would just amortize the premium on a straight line method by taking the original unamortized amount divided by the number of periods two years two times a year four periods and that'll give us an even amount that we're going to take down by each time period then the unamortized premium would just go down prior amount minus that making it go down to here and the carrying amount will always be the face amount minus the unamortized premium and then this will be the same it'll go down by the same amount so this will be whatever it was prior minus the same amount the unamortized the carrying amount then is the 100 minus the 1773 and so on and so forth until at the end this amount goes down to zero leaving us with just the bond face amount which is what we'll actually pay of course at the end of the bond. Now we'll do this with the effective method and you'll see that these amounts will change slightly based on the carrying amount so same starting point the unamortized premium equals the 103 546 minus the 100 the carrying amount is always going to equal the face amount plus the premium because it's always going to be higher because it's issued out of premium. So then we're going to say the cash and this is just going to be the cash calculation and this will be the contract so this is actually what we're paying it's in the contract the face amount that's on the bond times point one two twelve percent that's for a year though so we're going to divide that by two so six thousand so what we're actually going to pay is going to equal one more time the one hundred thousand times twelve percent divided by two because every six months and then the bond interest is going to be based on this number on the carrying amount so that's going to be equal to the carrying amount and then we're going to multiply it times the actual or the market rate that's well percent that would be for a year so we divided by two so again our calculation is going to be the carrying amount 103 546 times the market rate 10 percent that's for a year divided by two for six months so there's that and then the difference between those two equals the six thousand minus the five one seven seven is the am as the amortization change so the unamortized premium then is what it was before minus that change and then our carrying amount will always be equal to the the face amount of one hundred thousand plus the unamortized premium so we'll go through this a few more times it'll be very similar here we're going to say the cash paid will be equal to and we could just point to the six thousand but I'll do the calculation again because we want to really get down the difference between the stated rate when to use it when use the market rate so it's going to be the 100,000 times the stated rate the rate on the bond divided by two and then the bond interest is going to equal the carrying amount times the market rate and then we're going to take that and divide it by two and then the difference is going to be the six thousand minus the bond interest the payment minus the interest that'll give us the change in the premium and then and then the amortization and then we got the unamortized premium which will be what it was prior minus the change and then we'll say that the carrying amount will always be equal to the face amount plus the unamortized premium and that'll give us our new amount here so we'll do this again again the cash payment could be the six thousand but we'll do the calculation it's going to be the hundred thousand times the stated rate the rate on the bond divided by two the bond interest is going to be equal to the carrying amount times the market rate divided by two because it's six months not a year and then the difference is going to be equal to the six thousand minus the bond interest and then that change in the premium is going to be equal to the prior amount minus the change and then our carrying amount will be equal to the face amount of the bond plus the unamortized premium we'll do this one more time and this should go down to zero now and this should go down to 100,000 the face amount of bond so the cash payment again it could equal this but I'm going to do it one more time over here the 100,000 times the 12% the stated rate divided by two the bond interest is the carrying amount times the market rate divided by two the difference will be the 600,000 minus the bond interest and that of course will bring this down to zero by taking the unamortized prior minus the change and now the carrying amount is always the 100,000 plus the unamortized amount which is zero and that would be where we are left then we would pay off the bond now let's see what this would look like in terms of a journal entry if I was to journalize this first transaction we're gonna say here's our trial balance over here where we have put the bond on the books so we've issued the bond for 103,546 it's got a premium of this 3,546 now we're gonna make our interest payment and reduction of premium at the first six month time period so we're gonna to do that we're gonna say okay is cash affected yeah cash is going down we're gonna make a cash payment so I'll copy cash we'll put that on the bottom here so we're in Q4 right-click and paste 123 now the payment we're gonna make I'm gonna put a negative to make it a credit and it's just gonna be what we're given here so we paid 6,000 and then the debit's gonna go to bond interest expense but it's not gonna be for the 6,000 I'll put that up top now we'll copy that we'll put that up top but it's not gonna be for the 6,000 because we're gonna have to amortize the premium as well so I usually think about the premium then by going so well this is a credit I'm gonna have to debit it to make it go down I'm gonna right-click and copy I'll put that here now notice I haven't constructed this quite as nicely as we could have because we could have put the two debits on top I'm just gonna construct it in whatever may way makes the most sense to me to build this thing and so and then we could reform out the debits on top later if we choose to do so or you can leave it in whatever order would make more sense to you to go back to it and see it so the bond premium then that we're gonna pick up is gonna be this amount this 123 and then the difference between those two the 6,000 minus 123 will be the amount on the interest expense I would do that with a negative sum going from the bottom to the top or you can move this thing out of the way so that the two debits now equal the credit the other way you can do this of course is to take the interest expense from the table here and then and then use the plug here either way just to see that the whole thing will balance out okay so then if we record this we're gonna say alright here's the bond interest bond interest is down here we're gonna say this equals the 5,177 bringing this amount up putting us out of balance bringing net income down here's the cash here's the cash up top we're in the middle column w3 equals the 6,000 bringing this amount down here's the premium here's the premium or in the middle column w7 equals 8,000 or 823 bringing this amount down so if we tie this out to the table then we're gonna say alright the tape we should have an unamortized premium 2007 23 and the carrying amount 102 723 so the unamortized premium 2007 23 carrying amount is this plus this 102 723 let's do this one more time you'll note that of course when you compare this to the to the straight line method we have an even change here I'm gonna ungreen this and we'll record the second payment so six months have passed we're going to the second payment now we'll make this green okay and that the transaction will be the same I'm just gonna copy the transaction but the numbers will change the cash is still going to be a credit of this 6,000 the premium now change is going to be a debit of this number so that's going to differ and we can pull this from the table or we can use our negative sum plug formula of these so that's the 5136 5136 so if we post this out and again we're jumping six months ahead and obviously other activity would happen hopefully during that time period but we're gonna post this within the same information here and see what would happen concentrating of course on our bonds here so here's our bond interest expense here's our bond interest double click on that we're going to go to the end of it plus point to that 5136 bringing this up putting this out of balance bringing that income down then we've got the cash so here's the cash we're gonna be in the middle column double click on that go to the end of it plus point to the 6,000 bringing that amount down then we've got the bond premium and here it is here we're gonna go to the middle column double click go to the end of it plus and pick up that number and there we have that so then we should be according to our table at a unamortized premium 1,856 carrying amount 101,859 so here's our unamortized premium 1,856 and the carrying amount being the sum of those two 101,859