A premium on bonds payable occurs when bonds have a contract rate greater than the market rate at issuance.

Question

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A premium on bonds payable occurs when the contract rate on bonds is higher than the market rate at the time of issuance. This means that investors are willing to pay more than the face value of the bond in order to receive the higher interest payments. The difference between the face value and the amount paid by investors is recorded as a premium on bonds payable in the company's financial statements.

A Premium on Bonds Payable Occurs When Bonds Have a Contract