Final answer:
The statement is true: amortization of the bond premium increases interest expense and reduces the premium on bonds payable.
Step-by-step explanation:
The adjusting entry for bond premium amortization indeed increases interest expense and decreases the balance in premium on bonds payable. This entry reflects the gradual recognition of the premium on bonds payable as interest expense over the life of the bond. Hence, the statement is True.
When a bond is issued at a premium, it means the bond is sold for more than its face value. The premium represents additional money that the issuer receives and must be amortized over the life of the bond.
The premium on bonds payable account is a contra-liability account that decreases the value of the bond liability on the balance sheet. Amortization of the bond premium reduces this account and allocates part of the premium to interest expense on the income statement, which effectively increases the expense. This aligns the interest expense shown on the income statement with the actual cash interest payments made to bondholders, which are based on the nominal interest rate of the bond.