How to Account for Bonds
Set up a Bonds Payable account., Record the appropriate book entries upon issuing the bond., Make entries to record a bond premium or discount., Allow for issuance costs.
Step-by-Step Guide
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Step 1: Set up a Bonds Payable account.
When a corporation issues a bond, they are essentially taking out loans from bondholders.
The bond issuer must then make accounting entries to recognize the receipt of cash and the amount owed to bondholders.
The amount owed back to bondholders at maturity is recorded in an account called Bonds Payable.
Open or update this account to record bond entries., The first accounting treatment occurs when the bond originates and warrants an entry in the accounting journal.
If the bond has been sold at face value, rather at a premium or discount, the entry made is very simple.
Record a debit to the Cash account and a credit to Bonds Payable, both for the total face value of the bonds issued.
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., Bonds not purchased at par are purchased either above par, at a premium, or below, at a discount.
Specifically, zero-coupon bonds (bonds that do not pay regular interest payments) are a type of bond offered at a discount.
If the bond sells at a premium or discount, three accounts are affected.
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.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., A bond issue will likely incur addition costs to the corporation.
These might include any legal expenses, commissions, printing expenses, and registration costs associated with the issue.
These expenses are recorded as a debit to Other Assets and a credit to the Cash account for the total amount of the costs.
They may then be amortized (recognized in regular increments) over the life of the bonds. -
Step 2: Record the appropriate book entries upon issuing the bond.
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Step 3: Make entries to record a bond premium or discount.
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Step 4: Allow for issuance costs.
Detailed Guide
When a corporation issues a bond, they are essentially taking out loans from bondholders.
The bond issuer must then make accounting entries to recognize the receipt of cash and the amount owed to bondholders.
The amount owed back to bondholders at maturity is recorded in an account called Bonds Payable.
Open or update this account to record bond entries., The first accounting treatment occurs when the bond originates and warrants an entry in the accounting journal.
If the bond has been sold at face value, rather at a premium or discount, the entry made is very simple.
Record a debit to the Cash account and a credit to Bonds Payable, both for the total face value of the bonds issued.
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., Bonds not purchased at par are purchased either above par, at a premium, or below, at a discount.
Specifically, zero-coupon bonds (bonds that do not pay regular interest payments) are a type of bond offered at a discount.
If the bond sells at a premium or discount, three accounts are affected.
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.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., A bond issue will likely incur addition costs to the corporation.
These might include any legal expenses, commissions, printing expenses, and registration costs associated with the issue.
These expenses are recorded as a debit to Other Assets and a credit to the Cash account for the total amount of the costs.
They may then be amortized (recognized in regular increments) over the life of the bonds.
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