This logic seems very practical, but the straight-line method is easier to calculate. If the primary consideration is to defer current income, Effective Interest rate method should be chosen for the amortization of premium on bonds. The Straight Method is preferable when the amount of premium is very less or insignificant.
This article has been a guide to what is Premium Bond Amortization and its definition. Here we discuss the top 2 methods to calculate amortization of bond premium along with practical examples, advantages, and limitations. You may learn more about accounting from the following articles —. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Free Accounting Course. Login details for this Free course will be emailed to you.
Forgot Password? Article by Madhuri Thakur. What is the Amortization of Bond Premium? When a bond is issued at a price higher than its face value, the difference is called Bond Premium. The issuer has to amortize the Bond premium over the life of the Bond, which, in turn, reduces the amount charged to interest expense Interest Expense Interest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.
In other words, amortization Amortization Amortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets such as trademarks, goodwill, and patents is expensed over a specific time period. This time frame is typically the expected life of the asset. Generally, bond market values move inversely to interest rates.
When interest rates go up, the market value of bonds goes down and vice versa. However, each year you must reduce your basis in the bond by the amortization for the year. IRS publication states that a bond holder can choose to begin amortizing the bond at any time.
However, if the bond holder wishes to stop amortizing the bond, the IRS must be notified. This choice does not affect the acquisition price to use, which is the price adjusted as if amortization began in the first year of ownership. Your email address will not be published. For each taxable bond, create a INT. Enter the interest in box 1 and the Bond Premium in Box Note that taxable bonds don't have to be amortized, but tax-exempt ones do. I don't agree that every bond needs to be broken out into it's own INT.
Certainly there can be situations where some bonds need that treatment, but not in normal situations. But it can be immensely helpful to break out total box 1 and 11 from box 3 and 12 , from box 8 and 13 into 3 separate INT forms. It is particularly critical to do this any time you bought any of the bond types with accrued interest to be declared Why sign in to the Community? Submit a question Check your notifications Sign in to the Community or Sign in to TurboTax and start working on your taxes.
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