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How to Account for Bonds Issued – Bonds payable

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Bonds are a form of long term debt contract when a bond coupon rate is equal to the market interest rate, the par value rate purchase by investors i.e. the bond issuers has to pay to the investors its face value of the amount has to pay back to the investors at the end of the term of the bond. Bonds issued at par are issued for consideration are equal to the principal amount of the bond.

The accounting for bonds payable issued at face value is simple because it does not involve any initial recognition of bond discounts or premium. Confirmation of periodic interest payments on bonds is also simple because there is no amortization of bond discounts or premiums. 

Journal Entries Example

Company ABC has issued 100,000 bonds of $1,000 face value each on 1 January 2019. These bonds have a maturity period of 5 years and carry a coupon rate of 8 % paid annually. The 8 % market interest rate at the time of the issue. The market interest rate prevailing now is 9%.

Issuance Journal Entry

Therefore there is no difference between the coupon rate on the bond and the interest rate prevalent in the market at the time of the issue, the bonds will be issued at par.

Company ABC shall account for the transaction as follows:

Cash    10 M   

  Bonds payable                      10 M

 The subsequent changes in market interest with reference to the coupon rate do not effect the carrying amount of the bond in the books of the issuers.

Interest Expense Entry Journal entry

The coupon payment of the bond issuer annual payment the bond issuer is required to make on the bond is called coupon payment.

Where

FV = Face value of the bond i.e. the principal amount

C= annual coupon rate i.e. the stated or contract interest rate

N=number of coupon payments per year

The company ABC, coupon payment is $(= 8% / 1*$1,000,000).Since there is no discount or premium, the interest expense in case of a bond issued at par is equal to the coupon payment as follows:

Interest Expense         $800,000        

   Cash            $800,000

The company ABC shall make five such coupon payments which shall be recognized as above.

Retirement of Bonds Journal Entry

The bond holder at the maturity period is liable to payback the principal amount to the investors. The differences its liability towards the investors. The face value of the retirement of the bonds involve the cash outflows.

After the 5 years Company ABC will repay the bonds and records it’s as follows:

Bonds Payable 0.1 M  

  Cash             0.1 M

Bond Principal Payment

The face value of a bond that the bond principal payment is the dollar amount. The bondholders should get the amount that the issuing corporation must provide on the date that bond matures or comes due. The principal amounts of the holders of the bonds are referred to as follows:

Face vale

Par or Par value according to bond payable

Maturity value or maturity amount

Stated value

Bond Interest and Principal Payment

When a corporation issues the bond it promises to pay the bondholders:

Interest every six month at the bond’s stated interest rate , and

In the maturity date, the principal or face amount when the bond comes due.

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