Bond Valuation, Premiums, Discounts, and Retirement Accounting

The present value of a bond is also known as its

market price.

The market price of a bond is equal to the:

present value of its principal amount plus the present value of all future interest payments.

Bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity are called

callable bonds.

When bondholders offer to sell their $6,000 of bonds at 96 that they originally purchased for $5,800, the selling price is

$5,760.

Premium on Bonds Payable

is considered to be a reduction in the cost of borrowing.

The amortization of the bond premium decreases

both interest expense and bond carrying value.

Discount on Bonds Payable

is a contra account.

Hoffman Corporation retires its bonds at 106 on January 1, following the payment of annual interest. The face value of the bonds is $400,000. The carrying value of the bonds at the redemption date is $419,800. The entry to record the redemption will include a

debit of $19,800 to Premium on Bonds Payable.

When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the

carrying value of the bonds.

A $500,000 bond was retired at 98 when the carrying value of the bond was $494,000. The entry to record the retirement would include a

gain on bond redemption of $6,000.

Which one of the following amounts increases each period when accounting for a long-term mortgage payable?

Reduction of principal