At issuance, a bond issued at a premium has which characteristic?

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Enhance your accounting skills for the PSIA Accounting Exam. Use flashcards and multiple-choice questions to prepare effectively with hints and explanations. Get set for your exam success!

Multiple Choice

At issuance, a bond issued at a premium has which characteristic?

Explanation:
When a bond is issued at a premium, the issuer actually collects more cash than the bond’s stated face value. That extra amount isn’t income; it’s a liability to the bondholder and is recorded as Premium on Bonds Payable. The total liability on issuance is the face value plus the premium. Over the life of the bond, this premium is amortized and reduces the interest expense recognized each period. This is why the correct description is that cash received exceeds face value and the premium increases liability.

When a bond is issued at a premium, the issuer actually collects more cash than the bond’s stated face value. That extra amount isn’t income; it’s a liability to the bondholder and is recorded as Premium on Bonds Payable. The total liability on issuance is the face value plus the premium. Over the life of the bond, this premium is amortized and reduces the interest expense recognized each period. This is why the correct description is that cash received exceeds face value and the premium increases liability.

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