{"id":840,"date":"2015-05-13T18:23:34","date_gmt":"2015-05-13T18:23:34","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=840"},"modified":"2015-06-03T22:15:18","modified_gmt":"2015-06-03T22:15:18","slug":"recording-entries-for-bonds","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/recording-entries-for-bonds\/","title":{"raw":"Recording Entries for Bonds","rendered":"Recording Entries for Bonds"},"content":{"raw":"When a company issues bonds, it incurs a long-term liability on which periodic interest payments must be made, usually twice a year. If interest dates fall on other than balance sheet dates, the company must accrue interest in the proper periods. The following examples illustrate the accounting for bonds issued at face value on an interest date and issued at face value between interest dates.\r\n\r\nBonds issued at face value on an interest date<\/strong> Valley Company\u2019s accounting year ends on December 31. On 2010 December 31, Valley issued 10-year, 12 per cent bonds with a\u00a0$100,000 face value, for\u00a0$100,000. The bonds are dated\u00a0December 31, call for semiannual interest payments on June 30 and December 31, and mature in 10 years on December 31. Valley made the required interest and principal payments when due. The entries for the 10 years are as follows:\r\n\r\nOn\u00a0December 31, the date of issuance, the entry is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Dec 31<\/td>\r\nCash<\/td>\r\n100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Bonds Payable<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0To record bonds issued at face value.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nOn each June 30 and December 31 for 10 years, beginning 2010 June 30 (ending 2020 June 30), the entry would be (Remember, calculate interest as Principal x Interest x Frequency of the Year<\/em>):\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Jun 30<\/td>\r\nBond Interest Expense ($100,000 x 12% x 6 months \/ 12 months)<\/td>\r\n6,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record semiannual interest payment.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nOn\u00a0December 31 (10 years later), the maturity date, the entry would include\u00a0the last interest payment and the amount of the bond:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Dec 31<\/td>\r\nBond Interest Expense ($100,000 x 12% x 6 months \/ 12 months)<\/td>\r\n6,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nBonds Payable<\/td>\r\n100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n106,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record final semiannual interest and bond repayment.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNote that Valley does not need any interest adjusting entries because the interest payment date falls on the last day of the accounting period. The income statement for each of the 10 years would show Bond Interest Expense of\u00a0$12,000 ($ 6,000\u00a0x 2 payments per year); the balance sheet at the end of each of the years 1 to 8\u00a0would report bonds payable of\u00a0$100,000 in long-term liabilities. At the end of ninth year, Valley would reclassify the bonds as a current liability because they will be paid within the next year.\r\n\r\nThe real world is more complicated. For example, assume the Valley bonds were dated\u00a0October 31, issued on that same date, and pay interest each April 30 and October 31. Valley must make an adjusting entry on December 31 to accrue interest earned\u00a0for November and December but not paid until April 30 of the next year. That entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Dec 31<\/td>\r\nBond Interest Expense ($100,000 x 12% x 2 months \/ 12 months)<\/td>\r\n2,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Interest Payable (or Bond Interest Payable)<\/td>\r\n<\/td>\r\n2,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record accrued interest for November and December payable in April.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe\u00a0April 30 entry in the next\u00a0year would include the accrued amount from December of last year and interest expense for Jan to April of this year.\u00a0 We will credit cash since we are\u00a0paying cash to the bondholders.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Dec 31<\/td>\r\nBond Interest Expense ($100,000 x 12% x 4 months \/ 12 months)<\/td>\r\n4,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Interest Payable (or Bond Interest Payable)<\/td>\r\n2,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Cash \u00a0 ($100,000 x 12% x 6 months \/ 12 months)<\/td>\r\n<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record payment of 6 months bond interest.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSince the 6-month period ending October 31 occurs within the same fiscal year, the bond interest entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Oct 31<\/td>\r\nBond Interest Expense ($100,000 x 12% x 6 months \/ 12 months)<\/td>\r\n6,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record semiannual interest payment.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nEach year Valley would make similar entries for the semiannual payments and the year-end accrued interest. The firm would report the\u00a0$2,000 Bond Interest Payable as a current liability on the December 31 balance sheet for each year.\r\n\r\nIt would be nice if bonds were always issued at the par or face value of the bonds.\u00a0 But, certain circumstances prevent the bond from being issued at the face amount.\u00a0 We may be forced to issue the bond at a discount or premium.\u00a0 This video will explain the basic concepts and then we\u00a0will review examples:\r\n\r\nhttps:\/\/youtu.be\/ZuQ2evNCc48\r\n\r\nBond prices and interest rates<\/strong>\r\n

The price of a bond issue often differs from its face value. The amount a bond sells for above face value is a premium<\/span><\/strong>. The amount a bond sells for below face value is a discount<\/span><\/strong>. A difference between face value and issue price exists whenever the market rate of interest for similar bonds differs from the contract rate of interest on the bonds. The effective interest rate<\/span><\/strong> (also called the yield) is the minimum rate of interest that investors accept on bonds of a particular risk category. The higher the risk category, the higher the minimum rate of interest that investors accept. The contract rate of interest<\/span> <\/strong>is also called the stated, coupon, or nominal rate is the rate used to pay interest. Firms state this rate in the bond indenture, print it on the face of each bond, and use it to determine the amount of cash paid each interest period. The market rate fluctuates from day to day, responding to factors such as the interest rate the Federal Reserve Board charges banks to borrow from it; government actions to finance the national debt; and the supply of, and demand for, money.<\/p>\r\n

Market and contract rates of interest are likely to differ. Issuers must set the contract rate before the bonds are actually sold to allow time for such activities as printing the bonds. Assume, for instance, that the contract rate for a bond issue is set at 12%. If the market rate is equal to the contract rate, the bonds will sell at their face value. However, by the time the bonds are sold, the market rate could be higher or lower than the contract rate.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Market Rate = Contract Rate<\/td>\r\nBond sells at par (or face or 100%)<\/td>\r\n<\/tr>\r\n
Market Rate < Contract Rate<\/td>\r\nBonds sells at premium (price greater than 100%)<\/td>\r\n<\/tr>\r\n
Market Rate > Contract Rate<\/td>\r\nBond sells at discount (price less than 100%)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

As shown above, if the market rate is lower than the contract rate, the bonds will sell for more than their face value. Thus, if the market rate is 10% and the contract rate is 12%, the bonds will sell at a premium as the result of investors bidding up their price. However, if the market rate is higher than the contract rate, the bonds will sell for less than their face value. Thus, if the market rate is 14% and the contract rate is 12%, the bonds will sell at a discount. Investors are not interested in bonds bearing a contract rate less than the market rate unless the price is reduced. Selling bonds at a premium or a discount allows the purchasers of the bonds to earn the market rate of interest on their investment.<\/p>\r\n

Computing long-term bond prices involves finding present values<\/span><\/strong> using compound interest. Buyers and sellers negotiate a price that yields the going rate of interest for bonds of a particular risk class. The price investors pay for a given bond issue is equal to the present value of the bonds.<\/p>\r\n

Issuers usually quote bond prices as percentages of face value\u2014100 means 100% of face value, 97 means a discounted price of \u00a097%of face value, and 103 means a premium price of 103% of face value. For example, one hundred\u00a0$1,000 face value bonds issued at 103 have a price of $103,000 (100 bonds x $1,000 each x 103%). Regardless of the issue price, at maturity the issuer of the bonds must pay the investor(s) the face value (or principal amount)<\/span>\u00a0of the bonds.<\/p>\r\n

Bonds issued at a discount<\/strong> When we issue a bond at a discount, remember we are selling the bond for less than it is worth or less than we are required to pay back.\u00a0 We always record\u00a0Bond Payable at the amount we have to pay back which is the face value or principal amount of the bond.\u00a0 The difference between the price we sell it and the amount we have to pay back is recorded in a contra-liability account called Discount on Bonds Payable<\/strong>.\u00a0 This discount will be removed over the life of the bond by amortizing (which simply means dividing) it over the life of the bond.\u00a0 The discount will increase bond interest expense when we record the semiannual interest payment.\u00a0 Here is a video example and then we will do our own example:<\/p>\r\nhttps:\/\/youtu.be\/FjSvAmqIXOc\r\n

For our example assume\u00a0Jan 1 Carr issues $100,000, 12%\u00a03-year bonds\u00a0for a price of 95 1\/2 or 95.50%\u00a0with interest to be paid semi-annually on June 30 and December 30 for cash.\u00a0 We know this is a discount because the price is less than 100%.\u00a0 The entry to record the issue of the bond on January 1 would be:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Jan 1<\/td>\r\nCash ($100,000 x 95.5%)<\/td>\r\n95,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nDiscount on Bonds Payable ($100,000 bond - $95,500 cash)<\/td>\r\n4,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Bonds Payable ($100,000 bond amount)<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record issue of bond at a discount.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIn the balance sheet, the bonds would be reported with a carrying value<\/strong> equal to the cash received of $95,500 reported \u00a0as:\r\n\r\n\r\n\r\n\r\n\r\n
Long-term Liabilities:<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Bonds Payable, 12% due in 3 years<\/td>\r\n$100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Less: Discount on Bonds Payable<\/td>\r\n\u00a0 (4,500)<\/span><\/td>\r\n$95,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhen a company issues bonds at a premium or discount, the amount of bond interest expense recorded each period differs from bond interest payments.\u00a0 The bond pays interest every 6 months on June 30 and December 31.\u00a0 We will amortize the discount using the straight-line method meaning we will take the total amount of the discount and divide by the total number of interest payments<\/strong>.\u00a0 In this example the discount amortization will be $4,500 discount amount \/ 6 interest payment (3 years x 2 interest payments each year).\u00a0 The entry to record the semi-annual interest payment and discount amortization would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Bond Interest Expense<\/td>\r\n6,750<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0\u00a0 Discount on Bonds Payable ($4,500 \/ 6 interest payments)<\/td>\r\n<\/td>\r\n750<\/td>\r\n<\/tr>\r\n
Cash ($100,000 x 12% x 6 months \/ 12 months)<\/td>\r\n<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
To record periodic interest payment and discount amortization.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAt maturity, we would have completely amortized or removed the discount so the balance in the discount account would be zero.\u00a0 Our entry at maturity would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Jan 1 (maturity)<\/td>\r\nBonds Payable<\/td>\r\n100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nCash<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Bonds Payable ($100,000 bond amount)<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record payment of bond at maturity.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nBonds issued at a premium<\/strong> When we issue a bond at a premium, we are selling the bond for more than it is worth.\u00a0\u00a0 We always record\u00a0Bond Payable at the amount we have to pay back which is the face value or principal amount of the bond.\u00a0 The difference between the price we sell it and the amount we have to pay back is recorded in a liability account called\u00a0Premium on Bonds Payable<\/strong>.\u00a0 Just like with a\u00a0discount, we will remove the premium amount will be removed over the life of the bond by amortizing (which simply means dividing) it over the life of the bond.\u00a0 The premium will decrease bond interest expense when we record the semiannual interest payment.\u00a0 Here is a video example and then we will do our own example:\r\n\r\nhttps:\/\/youtu.be\/o00D3xqvJ-k\r\n\r\nFor our example assume\u00a0Jan 1 Carr issues $100,000, 12%\u00a03-year bonds\u00a0for a price of 105 1\/4 or 105.25%\u00a0with interest to be paid semi-annually on June 30 and December 30 for cash.\u00a0 We know this is a discount because the price is less than 100%.\u00a0 The entry to record the issue of the bond on January 1 would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Jan 1<\/td>\r\nCash ($100,000 x 105.25%)<\/td>\r\n105,250<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nPremium on Bonds Payable ($105,250 cash - $100,000 bond)<\/td>\r\n<\/td>\r\n5,250<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Bonds Payable ($100,000 bond amount)<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record issue of bond at a premium.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe carrying value<\/span><\/strong> of these bonds at issuance is equal to the cash received of $105,250, consisting of the face value of\u00a0$100,000 and the premium of\u00a0$5,250. The premium is an adjunct account shown on the balance sheet as an addition to bonds payable as follows:\r\n\r\n\r\n\r\n\r\n\r\n
Long-term Liabilities:<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Bonds Payable, 12% due in 3 years<\/td>\r\n$100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Plus: Premium on Bonds Payable<\/td>\r\n5,250<\/span><\/td>\r\n$105,250<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nRemember, when a company issues bonds at a premium or discount, the amount of bond interest expense recorded each period differs from bond interest payments.\u00a0 A\u00a0premium decreases the amount of interest expense we record semi-annually.\u00a0 In our example, the bond pays interest every 6 months on June 30 and December 31.\u00a0 We will amortize the\u00a0premium using the straight-line method meaning we will take the total amount of the\u00a0premium and divide by the total number of interest payments<\/strong>.\u00a0 In this example the\u00a0premium amortization will be $5,250 discount amount \/ 6 interest payment (3 years x 2 interest payments each year).\u00a0 The entry to record the semi-annual interest payment and discount amortization would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Jun 30<\/td>\r\nBond Interest Expense ($6,000 cash interest - 875 premium amortization)<\/td>\r\n5,125<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nPremium on Bonds Payable ($5,250 premium \/ 6 interest payments)<\/td>\r\n875<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nCash ($100,000 x 12% x 6 months \/ 12 months)<\/td>\r\n<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record period interest payment and premium amortization.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nJust like with a discount, we\u00a0would have completely amortized or removed the\u00a0premium so the balance in the\u00a0premium account would be zero.\u00a0 Our entry at maturity would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Jan 1 (maturity)<\/td>\r\nBonds Payable<\/td>\r\n100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nCash<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0\u00a0 Bonds Payable ($100,000 bond amount)<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\nTo record payment of bond at maturity.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\nBonds issued at face value between interest dates<\/strong> Companies do not always issue bonds on the date they start to bear interest. Regardless of when the bonds are physically issued, interest starts to accrue from the most recent interest date. Firms report bonds to be selling at a stated price \u201cplus accrued interest\u201d. The issuer must pay holders of the bonds a full six months\u2019 interest at each interest date. Thus, investors purchasing bonds after the bonds begin to accrue interest must pay the seller for the unearned interest accrued since the preceding interest date. The bondholders are reimbursed for this accrued interest when they receive their first six months\u2019 interest check.\r\n\r\nUsing the facts for the Valley bonds dated 2010 December 31, suppose Valley issued its bonds on May 31, instead of on December 31. The entry required is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
May<\/td>\r\n31<\/td>\r\nCash<\/td>\r\n105,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n\u00a0\u00a0 Bonds payable<\/td>\r\n<\/td>\r\n100,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n\u00a0\u00a0 Bond interest payable ($100,000 x 12% x (5\/12))<\/td>\r\n<\/td>\r\n5,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n\u00a0To record bonds issued at face value plus accrued interest.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThis entry records the\u00a0$5,000 received for the accrued interest as a debit to Cash and a credit to Bond Interest Payable.\r\n\r\nThe entry required on\u00a0June 30, when the full six months\u2019 interest is paid, is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
June<\/td>\r\n30<\/td>\r\nBond Interest Expense ($100,000 x 0.12 x (1\/12))<\/td>\r\n1,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nBond interest payable<\/td>\r\n5,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n\u00a0To record bond interest payment.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThis entry records $1,000 interest expense on the\u00a0$100,000 of bonds that were outstanding for one month. Valley collected\u00a0$5,000 from the bondholders on May 31 as accrued interest and is now returning it to them.\r\n\r\n ","rendered":"

When a company issues bonds, it incurs a long-term liability on which periodic interest payments must be made, usually twice a year. If interest dates fall on other than balance sheet dates, the company must accrue interest in the proper periods. The following examples illustrate the accounting for bonds issued at face value on an interest date and issued at face value between interest dates.<\/p>\n

Bonds issued at face value on an interest date<\/strong> Valley Company\u2019s accounting year ends on December 31. On 2010 December 31, Valley issued 10-year, 12 per cent bonds with a\u00a0$100,000 face value, for\u00a0$100,000. The bonds are dated\u00a0December 31, call for semiannual interest payments on June 30 and December 31, and mature in 10 years on December 31. Valley made the required interest and principal payments when due. The entries for the 10 years are as follows:<\/p>\n

On\u00a0December 31, the date of issuance, the entry is:<\/p>\n\n\n\n\n\n\n
<\/td>\n<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
Dec 31<\/td>\nCash<\/td>\n100,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Bonds Payable<\/td>\n<\/td>\n100,000<\/td>\n<\/tr>\n
<\/td>\n\u00a0To record bonds issued at face value.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

On each June 30 and December 31 for 10 years, beginning 2010 June 30 (ending 2020 June 30), the entry would be (Remember, calculate interest as Principal x Interest x Frequency of the Year<\/em>):<\/p>\n\n\n\n\n\n\n
<\/td>\n<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
Jun 30<\/td>\nBond Interest Expense ($100,000 x 12% x 6 months \/ 12 months)<\/td>\n6,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Cash<\/td>\n<\/td>\n6,000<\/td>\n<\/tr>\n
<\/td>\nTo record semiannual interest payment.<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

On\u00a0December 31 (10 years later), the maturity date, the entry would include\u00a0the last interest payment and the amount of the bond:<\/p>\n\n\n\n\n\n\n\n
<\/td>\n<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
Dec 31<\/td>\nBond Interest Expense ($100,000 x 12% x 6 months \/ 12 months)<\/td>\n6,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\nBonds Payable<\/td>\n100,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Cash<\/td>\n<\/td>\n106,000<\/td>\n<\/tr>\n
<\/td>\nTo record final semiannual interest and bond repayment.<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Note that Valley does not need any interest adjusting entries because the interest payment date falls on the last day of the accounting period. The income statement for each of the 10 years would show Bond Interest Expense of\u00a0$12,000 ($ 6,000\u00a0x 2 payments per year); the balance sheet at the end of each of the years 1 to 8\u00a0would report bonds payable of\u00a0$100,000 in long-term liabilities. At the end of ninth year, Valley would reclassify the bonds as a current liability because they will be paid within the next year.<\/p>\n

The real world is more complicated. For example, assume the Valley bonds were dated\u00a0October 31, issued on that same date, and pay interest each April 30 and October 31. Valley must make an adjusting entry on December 31 to accrue interest earned\u00a0for November and December but not paid until April 30 of the next year. That entry would be:<\/p>\n\n\n\n\n\n\n
<\/td>\n<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
Dec 31<\/td>\nBond Interest Expense ($100,000 x 12% x 2 months \/ 12 months)<\/td>\n2,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Interest Payable (or Bond Interest Payable)<\/td>\n<\/td>\n2,000<\/td>\n<\/tr>\n
<\/td>\nTo record accrued interest for November and December payable in April.<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The\u00a0April 30 entry in the next\u00a0year would include the accrued amount from December of last year and interest expense for Jan to April of this year.\u00a0 We will credit cash since we are\u00a0paying cash to the bondholders.<\/p>\n\n\n\n\n\n\n\n
<\/td>\n<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
Dec 31<\/td>\nBond Interest Expense ($100,000 x 12% x 4 months \/ 12 months)<\/td>\n4,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Interest Payable (or Bond Interest Payable)<\/td>\n2,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Cash \u00a0 ($100,000 x 12% x 6 months \/ 12 months)<\/td>\n<\/td>\n6,000<\/td>\n<\/tr>\n
<\/td>\nTo record payment of 6 months bond interest.<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Since the 6-month period ending October 31 occurs within the same fiscal year, the bond interest entry would be:<\/p>\n\n\n\n\n\n\n
<\/td>\n<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
Oct 31<\/td>\nBond Interest Expense ($100,000 x 12% x 6 months \/ 12 months)<\/td>\n6,000<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n\u00a0\u00a0 Cash<\/td>\n<\/td>\n6,000<\/td>\n<\/tr>\n
<\/td>\nTo record semiannual interest payment.<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Each year Valley would make similar entries for the semiannual payments and the year-end accrued interest. The firm would report the\u00a0$2,000 Bond Interest Payable as a current liability on the December 31 balance sheet for each year.<\/p>\n

It would be nice if bonds were always issued at the par or face value of the bonds.\u00a0 But, certain circumstances prevent the bond from being issued at the face amount.\u00a0 We may be forced to issue the bond at a discount or premium.\u00a0 This video will explain the basic concepts and then we\u00a0will review examples:<\/p>\n