When a corporation issues a bond offering, the bond buyers become the company’s newest creditors. The company is obligated to make regular interest payments and to pay back the face amount of the bond at maturity. The company must also keep accounting records of the debt and the interest payments. The bonds are recorded in the long-term liability section of the company balance sheet, and the interest payments are recorded on the income statement as an expense.
Find the bond’s issue date, the total amount of the bond issue, the interest rate and the maturity date. For example, on January 1, 2012, the company issued a 10 percent $100,000 bond that matures on January 1, 2022. Interest is paid semi-annually on June 30 and December 30 each year. The bond does not carry a par value.Step 2
Compute the bond interest payment using the above as the example. The bond was issued for $100,000 and pays 10 percent annual interest. The company will make two $5,000 interest payments yearly ($100,000 x 10 percent x 6/12). The bond is recorded at its full face value and since it was issued on January 1, there is no accrued interest. Record the journal entry as a $100,000 debit to Cash and a $100,000 credit to Bonds Payable. The interest will be recorded as a debit to Interest Expense of $5,000 and a credit to Cash of $5,000 each time an interest payment is made.Step 3
Determine if the bonds were issued later than the planned date to account for the accrued interest. Using the above example, the company decides to issue the bonds on February 1 instead of January 1. The bond purchasers must pay back one month of accrued interest to the company. The accrued interest amount is calculated by taking the bond face amount multiplied by the interest rate multiplied by the number of months the interest accrued, $100,000 x 10 percent x 1/12, or $833.33 in accrued interest. The company will receive $100,833.33 instead of $100,000. The journal entry will be a debit to Cash of $100,833.33, a credit entry to Bonds Payable of $100,000 and a credit to Interest Payable of $833.33.Step 4
Record the June 30 interest payment journal entry as a $4,166.67 debit to Interest Expense, a $833.33 debit to Interest Payable and a $5,000 credit to Cash. The December 30 journal entry for the interest payment is a $5,000 debit to Interest Expense and a $5,000 credit to Cash.
- Corporations issue bonds instead of stock because bonds do not decrease the stockholder’s ownership interests.
- High risk often correlates with high interest rates, so beware of companies offering bonds carrying very high interest rates.
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