# Amortization in Bonds

Can someone explain where amortization shows up when you issue a premium or discount bond? I know that the amortization is the difference between IE and Coupon, and the amortization acts to decrease IE for premiums, increase IE for discounts. Can someone explain the mechanics of where amorization is recorded on each of the financial statements?

amortization is used to increase the book value of the bond to par value for discount bonds, and reduce it to par value for premium bonds, over the life of the bond then at the end you pay back the par value on the balance sheet, bonds are listed as a liability, recorded at either par value, a discount or a premium upon their issuance (depending on coupon rate and mkt. rate) interest expense is the book value of the bond at the beginning of the period multiplied by the market rate at issuance for premium bonds, mkt < cpn, and interest expense will be less than the coupon for discount bonds, mkt>cpn and interest expense will be greater than the coupon interest expense will always be CFO amortization is non-cash so it is not part of CFO the difference between interest expense and the coupon payment will serve to amortize the bond discount or premium towards par value over the life of the bond then at the end you have a big CFF payout when you pay the principal back

thanks sharpshooter. so is amoritzation explicitly stated as an entry on the B.S on the assets side? When you first issue a premium bond lets say: Time 1.BV of Liabilities increases, cash increases, TIme 2. In next period, BV of liability will DECREASE, but is this when the amortization kicks in and enters as a contra account on the assets side?

hmm, i’m not sure about that, i hope someone else can clarify

Discount bond Issue price is \$94.9 Journal entry: Cash (asset): 94.9 Discount on bond payable (asset): 5 Bond payable (liability): 100 The amortization on discount is added back to net income as a noncash expenses under the indirect method. Premium bond Issue price is \$105.4 Journal entry: Cash (asset): 105.4 Premium on bond payable (liability): 5.4 Bond payable (liability): 100 The amortization on premium is subtracted from net income as a noncash expenses under the indirect method.

so amortization of the bond discount is subtracted from net income and amortization of the bond premium is added to net income (goes to equity) ? is this after tax too, or do those items get taxed?

supersharpshooter Wrote: ------------------------------------------------------- > so amortization of the bond discount is subtracted > from net income > > and amortization of the bond premium is added to > net income (goes to equity) > > ? > > is this after tax too, or do those items get > taxed? In the cash flow statement (under the indirect method): - The amortization on discount bond is added back to net income as a noncash expenses under the indirect method. - The amortization on premium bond is subtracted from net income as a noncash expenses under the indirect method. In the income statement: - The amortization on discount bond is substracted from net income (like a normal amortization= - The amortization on premium bond is added to net income after tax.

that clears it up, thanks strangedays