Bond AccountingExplained & Defined with Examples
What is Bond Accounting?
Bond Accounting is the procedure used to record the receipt of cash from the buyer of issued bonds on a business’s balance sheet.
This procedure shows how the bond affects the business when it issues bonds at a discount, par, or a premium.
As an example, if a business issues a bond at its par value, it will record the cash the buyer pays for the bond as an asset and the same amount as a liability in bonds payable.
There are three different kinds of bonds.
- Bonds Issued at Par Value: When the coupon rate for a bond is the same as the market interest rate, the bond is issued at par.
- Bond Issued at a Discount: When the coupon rate for a bond is lower than the market rate, the bond is issued at a discount.
- Bonds Issued at a Premium: When the coupon rate for the bond is greater than the market rate, the bonds are issued at a premium.
Accounting for Bonds Issued at Par
The following is an example of how to account for bonds that are issued at par value.
On January 1, 2015, a three-year bond was issued at a face value of $200,000.
It has a coupon rate of 6%.
The market interest rate is 6%.
The present value of $1 table and the present value of an ordinary annuity (PVOA) table will be used to calculate the face value of the bond.
The steps are as follows.
- First, the interest to be paid on the bond each year needs to be calculated. This would be found by multiplying $200,000 by the interest rate of 6%. Therefore the interest on the bond would be $12,000 (200,000 x .06) per year.
- Next, the present value of the $1 table should be used to help calculate the present value of the face value of the bond. For this example, you would find the factor listed for three years at 6%, which is 0.8396. Then, you would multiply this by $200,000. This gives a face value of $167,920.
- The next step is to determine the present value of the coupon payments. You will use the present value of an ordinary annuity (PVOA) table to do this. Look up the factor for 6% at three years. The factor is 2.6730. You would then multiply this by $12,000. This gives the present value of the $12,000 interest payments as $32,076.
- The last step is to add together the present value of the bond’s face amount and the present value of the coupon payments to get the present value of the bond, which would be the issue price of the bond. This figure is slightly off due to rounding. The carrying value of the bond will be $200,000, which is the same as bonds payable.
The accounting entry for issuing this bond would be:
| Date | Account Name | Debit | Credit |
| January 1, 2015 | Cash | $200,000 | |
| Bonds Payable | $200,000 | ||
| The entry to record the issue of the bond at par | |||
The entry for the interest payment for the first year follows.
This entry will be made each year for three years.
| Date | Account Name | Debit | Credit |
| December 31, 2015 | Bond Interest Expense | $12,000 | |
| Cash | $12,000 | ||
| The entry to record the annual interest payment | |||
When the bond matures, the amount of the bond will be recorded along with the last interest payment.
| Date | Account Name | Debit | Credit |
| December 31, 2017 | Bond Interest Expense | $12,000 | |
| Bond Payable | $200,0000 | ||
| Cash | $212,000 | ||
| The entry to record the annual interest and the repayment of the bond | |||
Each year for the three-year period of the bond, the income statement would show interest expenses of $12,000.
The balance sheet would show $200,000 in bonds payable in the long-term liabilities section for each of the three years.
Accounting for Bonds Issued at a Discount
Next is an example of how to account for bonds issued at a discount.
On January 1, 2015, a three-year bond was issued at a face value of $200,000.
The bond has a coupon rate of 8%.
The market rate is 9%.
The present value of $1 table and the present value of an ordinary annuity (PVOA) table will be used to calculate the face value of the bond.
The steps are as follows.
- First, the interest that will need to be paid on the bond needs to be calculated. This will be $16,000 ($200,000 x .08).
- After this, the present value of the face value of the bond needs to be found. You will use the present value of $1 table to calculate this as in the previous example. You will take the factor for 9% for three years, which is .77218. So, the present value of the face value of the bond is $154,436.00 ($200,000 x .77218).
- Next, the present value of the coupon payments needs to be calculated. You will use the present value of an ordinary annuity (PVOA) table to calculate this number. Use the table and find the factor for 9% at three years, which is 2.53129. Next, you multiply this figure by $16,000. This will give a present value of the coupon payments of $40,500.64 ($16,000 x 2.53129).
- For the last step, add the present value of the face value of the bond to the present value of the coupon payments to get the issue price of the bond. The carrying value will not be equal to bonds payable because this bond was issued at a discount. The carrying value is $194,936.64, which is lower than the face value of $200,000. This means the discount on the bond is 5,063.36.
The following accounting entry would be used to record this bond being issued.
| Date | Account | Debit | Credit |
| January 1, 2015 | Cash | $194,936.64 | |
| Discount on Bonds Payable | $5,063.36 | ||
| Bonds Payable | $200,000 | ||
| The entry for issuing a bond at a discount | |||
The journal entry for the first year’s interest and amortizing the discount would be as follows.
This entry will be made each year for three years.
| Date | Account | Debit | Credit |
| December 31, 2015 | Bond Interest Expense | $17,687.79 | |
| Discount on Bonds Payable | 1687.79 | ||
| Cash | $16,000 | ||
| The entry to record the first interest payment and the amortization of the discount | |||
When the bond interest is recorded each year, it will be different from the bond interest paid.
The discount will be amortized over a three-year period using the straight-line method.
This will be $1687.79 each year.
Once the bond reaches maturity and the last interest payment is made, the following entry is made to record the payment of the bond.
| Date | Account | Debit | Credit |
| December 31, 2015 | Bond Payable | $200,000 | |
| Cash | $200,000 | ||
| The entry to record the payment of the bond | |||
The interest expense will be recorded on the income statement for each of the three years.
The amount recorded on the balance sheet would be $194,936.64 the first year and would increase by $1687.79 each year as the discount is amortized.
Accounting for Bonds Issued at a Premium
This example shows how to account for bonds issued at a premium.
The bond is issued at face value of $200,000.
The bond has a coupon rate of 10%, and the market rate is 8%.
The present value of the $1 table and the present value of an ordinary annuity (PVOA) table will be used to calculate the face value of the bond.
The steps are as follows.
- First, the interest the business will need to pay on the bond will be calculated. The interest would be $20,000 ($200,000 x .10).
- Next, the present value of the face value of the bond needs to be calculated. The present value of $1 table will be used to calculate this. You will look for the factor for three years at 8%, which is .79383. This factor is multiplied by $200,000 to give $158,766 ($200,000 x .79383).
- After this, the present value of the coupon payments should be computed. The present value of an ordinary annuity (PVOA) table gives the necessary value for this step. In this example, you will find the factor for 8% for three years, which is 2.57710. Multiplying this factor by $16,000 gives a present value for the coupon payments of $51,542 ($20,000 x 2.57710).
- Finally, add the present value of the coupon payments to the present value of the face value of the bond to get the issue price of the bond. The carrying value of the bond will be different than bonds payable since the bond is being issued at a premium. The carrying value is $210,308, which is higher than the face value of the bond. This means the premium on the bond is $10,308.
The following accounting entry would be used to record this bond being issued.
| Date | Account | Debit | Credit |
| January 1, 2015 | Cash | $210,308 | |
| Premium on Bonds Payable | $10,308 | ||
| Bonds Payable | $200,000 | ||
| The entry for issuing a bond at a premium | |||
The journal entry for the first year’s interest and for amortizing the premium would be as follows.
This entry will be made each year for three years.
| Date | Account | Debit | Credit |
| December 31, 2015 | Bond Interest Expense | $16,564 | |
| Premium on Bonds Payable | $3,436 | ||
| Cash | $20,000 | ||
| The entry to record the first interest payment and the amortization of the discount | |||
When the bond interest is recorded each year, it will be different from the bond interest paid.
The premium will be amortized over a three-year period using the straight-line method.
This will be $3,436 each year.
Once the bond reaches maturity and the last interest payment is made, the following entry is made to record the payment of the bond.
| Date | Account | Debit | Credit |
| December 31, 2015 | Bond Payable | $200,000 | |
| Cash | $200,000 | ||
| The entry to record the payment of the bond | |||
The interest expense will be recorded on the income statement for each of the three years.
The amount recorded on the balance sheet would be $210,308 the first year and would decrease by $3,436 each year as the premium is amortized.
FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.
Harper College "ACCOUNTING FOR LONG-TERM LIABILITIES" Page 1 - 27. April 18, 2022
Brighman Young University "21. Investing 4: Understanding Bonds" Page 1 - 20. April 18, 2022