To record the sale of a $1000 bond, for example, debit Cash for $1000 and credit Bonds Payable (a long-term liability account) for $1000. The face value of the bonds represents the amount at which they will be redeemed or paid off at maturity. This can also be called the par, stated, or maturity value of the bond. [2] X Research source
To record the sale of a $1000 bond that sells at a premium for $1080, for example, debit Cash for $1080. Then, Credit Bonds Payable for $1000 and Premium on Bonds Payable (a liability account) for $80. A similar entry is made if the bond sells at a discount. Consider a $1000 bond selling for $950. To record the sale, debit Cash for $950 and Discount on Bonds Payable (a contra-liability account) for $50, and credit Bonds Payable for $1000. [3] X Research source Similarly, a zero-coupon bond is recorded as a bond sold at a discount. For example, a $2,000 zero-coupon bond might be sold at a discount for $1,780. This would be recorded as a debit to Cash for $1,780, a debit to Discount on Bonds Payable for the difference, $220, and a credit to Bonds Payable for $2,000. [4] X Research source
If the issuing company prepares financial statements annually or quarterly, the interest expense needs to be recorded only as the coupon payments are made. Using the previous example, there would be two entries per year in the general journal. Each entry would debit Interest Expense for $60 and credit Cash for $60. If the company prepares monthly financial statements, journal entries will also be needed each month to recognize the accrued interest. In the example above, each month the firm would debit Interest Expense for $10 and credit Interest Payable for $10. [6] X Research source
Consider a $1000 bond that sells for $1050 and has a coupon rate of 12 percent and a length of five years. When the bond is sold, the account named Premium on Bonds Payable will have a $50 credit balance. This balance needs to be amortized by the same amount each time a coupon payment is made. The amortization will be recorded in ten equal parts (semiannual payments for 5 years = 10 total payments). This means each part will be $50/10, or $5. When a coupon payment is made on the above bond, the journal entry will call for a debit to Interest Expense for $55, a debit to Premium on Bonds Payable for $5, and a credit to Cash for $60. An opposite entry is made to amortize a bond discount. Assuming the same bond terms but at a discount price of $950, the amortization would be recorded at each interest payment as a $65 debit to Interest Expense, a $5 credit to Discount on Bonds Payable, and a $60 credit to Cash. [7] X Research source A similar entry is made to account for zero-coupon bond interest. For example, imagine a zero-coupon bond sold at a discount for $1,780 with a face value of $2,000 and a duration of 2 years. This represent an annual “interest” rate of 6 percent. This 6 percent rate is recognized each year with a debit to Interest Expense and a credit to Bonds Payable, both in the amount of the interest that year. This would be $107 in year 1 and $113 in year two. [8] X Research source
For example, imagine your bond issuance costs were $12,000 and your bonds mature in 5 years. Divide the $12,000 by the total number of months to maturity (60) to get the monthly expense, which would be $200. Each month, recognize a debit to Bond Issue Cost Expense (an Income Statement account) for $200 and a credit to Bond Issue Costs (a Balance Sheet account) for $200. [9] X Research source
For example, a $1,000 bond’s redemption would be recorded as a $1,000 credit to Cash and a $1,000 debit to Bonds Payable.
For example, imagine a bond with a par value of $1,000 that was sold at a premium that has been amortized down to $50, for a total carrying value of $1,050. The early call price is stated at $1,200. The loss on bond redemption would be the difference of these two prices, which is $150. The entries made would be debits to Bonds Payable for $1,000, Premium on Bonds Payable for $50, and Loss on Bond Redemption for $150. There would also be a credit to the Cash account for $1,200. [11] X Research source
For example, a $1,000 bond purchased at a premium for $1,050 would be recognized as a $1,050 debit to Investment in Bonds and a $1,050 credit to Cash. The Investment in Bonds Account is sometimes called Investment in Long-Term Securities so that other long-term securities may be included in the same account. [12] X Research source Bonds with a maturity date of less than one year are included in current assets. Long-term bonds are transferred from long-term assets to current assets in the year preceding their maturity. When they are transferred, bonds are valued at the lower of book value at the date of transfer and original cost. [13] X Research source
For example, imagine a $1,000, 3-year bond, that pays 5 percent interest semiannually. The bond was purchased at a premium for $1,060. The interest payment would be half of 5 percent of $1,000, or $25. However, the $60 premium must be amortized for $10 each time interest is paid because there are six total payments. So, the entries made would be a debit to Cash for $25 (the payment), and credits to Interest Income for $15 and Investment in Bonds for $10. For a discounted bond with the same terms sold at $970, the opposite entries would be made. This time, interest income would be increased from the $25 received to include some of the discount (specifically $5, as the $30 discount would be spread out over 6 payments). The entries made here would be debits to Cash for $25 and Investment in Bonds for $5, and then a credit to Interest Income for the sum, which would be $30.
