Question

Which of the following is true of the Premium on Bonds Payable account? (The bonds are due in ten years.)

A. It is added to the Bonds Payable balance and shown with long-term liabilities on the balance sheet.
B. It is added to the Bonds Payable balance and shown with stockholders' equity on the balance sheet.
C. It is subtracted from the Bonds Payable balance and shown with long-term liabilities on the balance sheet.
D. It is subtracted from the Bonds Payable balance and shown with the current liabilities on the balance sheet.

Answer 1

The Premium on Bonds Payable account is added to the Bonds Payable balance and shown with long-term liabilities on the balance sheet.

Step-by-step explanation:

The Premium on Bonds Payable account represents the amount by which the bonds were issued above their face value. When bonds are issued at a premium, the Premium on Bonds Payable account is added to the Bonds Payable account. This increases the total liability shown on the balance sheet under long-term liabilities. The Premium on Bonds Payable account will be amortized over the term of the bond and will reduce the interest expense over time.

The Premium on Bonds Payable account is added to the Bonds Payable balance and shown with long-term liabilities on the balance sheet. This is because the premium represents the additional amount that investors are willing to pay above the face value of the bonds. It accounts for the difference between the cash received from issuing the bonds and the amount that must be repaid upon maturity. Over the life of the bonds, this premium is amortized and reduces the interest expense recorded. Since the bonds are due in ten years, both the Bonds Payable and the associated premium are considered long-term.