Using the straight line method compute the amortization amount first and then compute interest expense. The amortization for each period is the total premium or discount divided by the number of interest periods. Book value over time The book value of a bond issued at a premium decreases over time to face value at the maturity value. The book value of a bond issued at a discount increases over time to reach face value at the maturity date. The book value is increasing towards face value and interest expense is based on book value.
Interest expense decreases each period if the bond is issued at a premium.
The book value is decreasing so the interest expense decreases. If a bond is purchased between interest dates, the purchase price is the present value at the period interest date plus interest accrued since the last interest date. Accrual Interest expense must be accrued at accounting year end if the accounting year and the bond year are different. Bond issue costs Bond issue costs reduce net proceeds of the bond issue. Issue costs increase a discount and reduce a premium.