Assume a company issues $100 million in bonds with a 5% annual interest rate. When the market interest rate is 5.1 percent and no interest has accumulated, the bonds are issued. As a result, the bonds were purchased for $99.5 million by the investors. The corporation also had bond issue charges of $1 million, which were paid from the revenues of the bonds.
How do you account for the cost of bond issuance?
Debit the debt issuance costs account and credit the accounts payable account to account for the associated liability to account for the expenses associated with bond issuance. Because the debt issuance account is an asset account, the issuance costs will be recorded first in the bond issuer’s balance sheet.
The asset will be gradually charged to expense. To shift the cost from the balance sheet to the income statement, debit the debt issuance expenditure and credit the debt issuance account.
What is the journal entry for noting a premium bond’s issuance?
To record this transaction, make a debit cash entry for $103,465. Bonds payable for the face value of $100,000 and premium on bonds payable for $3,465, which is the difference between face and cash received at issuance, are the two accounts to credit.
How do you keep track of a discount bond?
If the bonds were issued with a discount or premium, the amount must be amortized over the life of the bonds. If the quantity is little, a straight-line calculation can be used. Calculate the periodic amortization using the effective interest method if the amount is significant or if a higher level of accuracy is desired.
If the issuer received a discount on bonds payable, the periodic entry is a debit to interest expense and a credit to discount on bonds payable, which increases the issuer’s overall interest expense. The entry is a debit to premium on bonds payable and a credit to interest expenditure if there was a premium on bonds payable; this reduces the issuer’s overall interest expense.
The amortization of bond issuance costs is recorded as a credit to financing expenditures and a negative to other assets on a quarterly basis.
When a corporation issues bonds between interest dates, what is the entry to record the bond issuance?
How much should the bond discount be lowered for the six months ending December 31, 2013 if the effective interest method is used? If bonds are issued between interest dates, the entry to record the issuance of the bonds will contain a credit to interest payable that has accrued.
What does it cost to issue bonds?
The expenses associated with an issuer’s issuance of bonds to investors are known as bond issue charges. These expenditures are capitalized at first and subsequently charged to expense during the life of the bonds. Accounting fees, commissions, legal fees, printing charges, registration fees, and underwriting fees are all possible bond issue costs.
On the balance sheet, these expenses are deducted from the bond liability. Using the straight-line method, the expenditures are then charged to expense over the life of the corresponding bond. You charge the same amount to expense in each period for the life of the bonds if you use this amortization approach. Bond issue costs should be charged to expense for the entire period from the date of issuance to the date of maturity.
If a bond issuance is paid off early, all remaining bond issuance costs should be charged to expense when the remaining bonds are retired.
What is the definition of debt issuance?
A debt issuance is a financial obligation that enables the issuer to raise funds by pledging to repay the lender at a future date and in accordance with the contract’s terms. A fixed business or government obligation, such as a bond or debenture, is referred to as a debt issue.
What is the meaning of a bond issuance premium?
The excess, if any, of a debt instrument’s issue price over its stated redemption price at maturity is known as bond issuance premium. An issuer amortizes bond issuance premium by offsetting qualified stated interest allocable to an accrual period with bond issuance premium allocable to the accrual period.
In a book, how do you record bond premium?
When a company prepares to issue or sell a bond to investors, it may assume that the proper interest rate will be 9%. The bond will sell for its face value if investors are ready to accept the 9% interest rate. If the market interest rate at the time the bond is issued is less than 9%, the corporation will receive more than the bond’s face value. The premium on bonds due, bond premium, or premium is the amount received for the bond that is in excess of the bond’s face amount (excluding accumulated interest).
Let’s pretend that a firm issued a $100,000 bond in early December 2019 with a stated interest rate of 9%. (9 percent per year). The bond was issued on January 1, 2020, and it will mature on December 31, 2024. The bond’s interest is paid twice a year, on June 30 and December 31. This means the corporation will be compelled to pay $4,500 in interest every six months ($100,000 x 9% x 6/12).
Let’s pretend that the market interest rate for this bond decreases to 8% right before it is sold on January 1st. Instead of altering the bond’s stated interest rate to 8%, the firm decides to issue a 9% bond on January 1, 2020. The corporation will receive more than the bond’s face value because this 9% bond will be sold when the market interest rate is 8%.
Assume that this 9% bond, issued in an 8% market, will sell for $104,100 + $0 in interest. On January 1, 2020, the corporation’s journal entry to reflect the bond’s issuance will be:
Premium on Bonds Payable is a liability account that will always appear alongside Bonds Payable on the balance sheet. To put it another way, if the bonds are a long-term obligation, both Bonds Payable and Premium on Bonds Payable will be long-term liabilities on the balance sheet. The book value, also known as the carrying value of the bonds, is the sum of these two accounts. This bond’s book value is $104,100 as of January 1, 2020 ($100,000 credit balance in Bonds Payable + $4,100 credit balance in Premium on Bonds Payable).
Premium on Bonds Payable with Straight-Line Amortization
The balance in the account Premium on Bonds Payable must be lowered to zero over the life of the bond. The bond premium of $4,100 in our case must be decreased to $0 over the bond’s 5-year term. The bond’s book value will drop from $104,100 on January 1, 2020 to $100,000 when the bonds mature on December 31, 2024 if the bond premium is reduced to zero. Amortization is the process of reducing the bond premium in a rational and systematic manner.
The corporation got a bond premium of $4,100 since its interest payments to bondholders will be higher than the amount demanded by market interest rates. As a result, the account Interest Expense will be used to amortize the bond premium. During the life of the bond, there must be a credit to Interest Expense and a debit to Premium on Bonds Payable at each accounting period. The straight-line method of amortization will be demonstrated in this section. (We’ll show you how to use the effective interest rate method in Part 10.)
Straight-Line Amortization of Bond Premium on Annual Financial Statements
The amortization of the bond premium can be recorded once a year if a firm only produces yearly financial statements and its accounting year ends on December 31. The annual straight-line amortization of the bond premium for a 9% $100,000 bond issued for $104,100 and due in 5 years will be $820 ($4,100 divided by 5 years).
When a company only publishes annual financial statements, however, the amortization of the bond premium is frequently recognized when the company makes semiannual interest payments. On June 30 and December 31, the journal entries will be as follows:
The net sum of $8,180 comes from the interest payments and bond amortization ($4,500 of interest paid on June 30 + $4,500 of interest paid on December 31 minus $410 of amortization on June 30 and minus $410 of amortization on December 31). This $8,180 will be reported in the Interest Expense account for the year 2020, as shown in the T-account below:
Under the straight-line technique of amortization, the balance in the account Premium on Bonds Payable will decline over the 5-year life of the bonds as shown in the T-account below.
The following table illustrates how the bond’s book value will decline from $104,100 to $100,000 at maturity:
Straight-Line Amortization of Bond Premium on Monthly Financial Statements
If monthly financial statements are published, the bond premium will be amortized at a rate of $68.33 per month ($4,100 of bond premium divided by 60 months of bond life). The 12 monthly amortization entries, as well as the semiannual interest payments of June 30 and December 31, are listed below for the year 2020:
If all of the bonds remain outstanding, the journal entries for the years 2021 through 2024 will be comparable.