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A $3,769 premium on five-year bonds is amortized straight-line. The annual amortization entry credits Interest Expense for $754. Why is Interest Expense credited rather than debited?
ABecause the premium represents income that reduces the period's interest expense
BBecause a premium increases the total interest the corporation owes
CBecause cash is being collected from bondholders each year
DBecause the bond's face amount is being increased each year
Answer & Solution
Correct answer: A. Because the premium represents income that reduces the period's interest expense
1. A premium means the issuer collected more cash than it will repay, an effective income to the corporation.
2. Each year part of that premium is recognised, reducing net interest cost.
3. Reducing an expense is recorded as a credit to Interest Expense ($754).
4. The offsetting debit reduces Premium on Bonds Payable. Option B reverses the effect; premium lowers, not raises, net interest.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.4 "Amortizing the premium", p.231_
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