Bonds payable is a liability account that holds the amount that the issuer owes to bondholders. Because bonds frequently mature in more than one year, this account is usually seen in the long-term liabilities part of the balance sheet. If they are due to mature in less than a year, the line item is moved to the current liabilities part of the balance sheet.
The face value of the bonds, the interest rate to be paid to bond holders, special repayment terms, and any covenants placed on the issuing corporation are all contained in the bond indenture agreement.
What are some examples of payable bonds?
Typically, public utilities issue bonds to help finance a new electric power plant, hospitals issue bonds for new buildings, and governments issue bonds to fund projects, cover operational deficits, or redeem maturing bonds.
For example, a prosperous public utility might issue 30-year bonds to cover half of the cost of a new energy generating power plant. If the current market interest rate on bonds is 4%, the cost after income tax savings might be as low as 3%.
Is a current liability a bond payable?
If the issuer of the bonds must utilize a current asset or create a current liability to pay the bondholders when the bonds mature within one year of the balance sheet date, the bonds will be recorded as a current liability.
The bonds, on the other hand, could be recorded as a long-term liability until they mature if:
- The corporation has a sufficient long-term investment that is only used to pay bondholders when the bonds expire. A bond sinking fund is a sort of investment like this.
- The corporation has a binding agreement that states that existing bonds will be refinanced by the issuance of new bonds or equity.
How do you keep track of payable bonds?
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.
What is the procedure for executing a bond payable?
Bonds can be sold at a discount, at a premium, or at par. The difference between the coupon rate and the market yield at the time of issuance determines their pricing. When a bond is issued, the face amount of the bond is recorded as the bonds payable. They are paid cash for the bond’s fair market value, and the difference (if any) is recorded as a premium (discount) on bonds payable.
Is it a credit or a debit to pay bonds?
Bond redemption is accounted for. All premiums and discounts should have been amortized by the time the bonds are redeemed, so the entry is simply a debit to the bonds payable account and a credit to the cash account.
Is it possible to include bonds in the cash flow statement?
The cash flow statement should show bond activity from the time the security is issued to the time it is finally settled. Whether the activity is reflected in which part of the statement depends on whether the company issued or bought the bonds. The relevant activity will be reported in the financing section of the cash flow statement by bond issuers. All connected cash transactions will be reported in the investment section by bondholders.
Is it possible to use bonds as working capital?
The difference between a company’s current assets (what it owns) and current liabilities (what it owes) is known as working capital, or net working capital (NWC) (what the business owes). It is a method of determining a company’s short-term financial health, operational efficiency, and liquidity. Working capital informs creditors about a company’s ability to repay its loans within a year.
A company’s current assets are tangible and intangible assets that can be converted into cash. Checking and savings accounts, accounts receivable, inventory, bonds, mutual funds, and stocks are all examples of this.
Any debts and expenses incurred during the last year are referred to as current liabilities (or one business cycle). Rent, utilities, and supplies are all included, as are accounts due, accumulated income taxes, salaries, and dividends payable.
A company’s working capital is positive when its current assets surpass its current liabilities. If a company has a lot of positive working capital, it has a lot of room to grow. The term “zero working capital” refers to a company’s current assets and current liabilities being equal. This is especially true in demand-driven businesses with little to no inventory.
How Do You Calculate Working Capital?
Working capital is calculated by subtracting a company’s current assets from its current liabilities. This indicator assesses short-term liquidity and the ability to repay short-term obligations within a year.
The current ratio can also be used to calculate working capital. The current ratio is calculated by dividing a company’s current assets by its current liabilities.
Is a bond a short-term or long-term obligation?
A long-term liability is recorded for the long-term portion of a bond payment. The majority of a bond’s payment is long term because bonds typically last for many years. A long-term liability is the present value of a lease payment that goes beyond one year. Deferred tax liabilities are often carried forward to subsequent tax years, making them a long-term liability. Except for payments due in the next 12 months, mortgages, auto payments, and other loans for machinery, equipment, or land are long term. On the balance sheet, the portion due within a year is designated as a current portion of long-term debt.
What is the average bond payable balance?
When a company prepares a bond to be issued/sold to investors, it may need to factor in the interest rate that will appear on the bond’s face and in its legal contract. Assume that the company issues a $100,000 bond with a 9% interest rate. A financial crisis happens just before the bond is issued, and the market interest rate for this sort of bond rises to 10%. If the company proceeds with the sale of its 9% bond in the 10% market, it will receive less than $100,000. A bond is considered to have been sold at a discount when it is sold for less than its face value. The difference between the amount received (excluding accrued interest) and the bond’s face amount is known as the discount. The terms “discount on bonds payable,” “bond discount,” and “discount” are used to describe the difference.
Assume a corporation prepares a 9% $100,000 bond dated January 1, 2020 in early December 2019 to demonstrate the discount on bonds payable. Until the bond matures on December 31, 2024, interest payments of $4,500 ($100,000 x 9% x 6/12) will be due on June 30 and December 31 each year.
Let’s now say that the market interest rate on this bond rises to 10% immediately before it is offered to investors on January 1st. Rather of revising the bond paperwork to reflect the market interest rate, the firm decides to sell the 9% bond. Because the corporation is selling its 9% bond in a market that is wanting 10%, the corporation will receive less than the bond’s face value.
Assume that on January 1, 2020, the 9 percent bond is sold in the 10% market for $96,149 plus $0 accrued interest to demonstrate the accounting for bonds payable issued at a discount. The following is the journal entry that the corporation will make to document the bond sale:
Because it will have a debit balance, the account Discount on Bonds Payable (or Bond Discount or Unamortized Bond Discount) is a contra liability account. The account Bonds Payable will always show a discount on Bonds Payable on the balance sheet. In other words, if the bond is a long-term liability, the balance sheet will show both Bonds Payable and Discount on Bonds Payable as long-term liabilities. The book value or carrying value of the bonds is the sum of these two accounts, or the net of these two accounts. The book value of this bond on January 1, 2020 is $96,149 (the $100,000 credit balance in Bonds Payable minus the $3,851 debit amount in Discount on Bonds Payable).
Discount on Bonds Payable with Straight-Line Amortization
The sum in the account Discount on Bonds Payable must be lowered to zero over the life of the bond. Amortizing or amortization is the process of reducing the account amount in a rational manner. Because the difference between a bond’s stated and market interest rates causes the discount, the journal entry for amortizing the discount will use the account Interest Expense.
The bond discount of $3,851 in our example arises from the firm getting only $96,149 from investors but needing to pay them $100,000 when the bond matures. Over the life of the bonds, the $3,851 discount is recognized as an additional interest charge. Straight-line amortization occurs when the same amount of bond discount is recorded each year. The straight-line amortization in this case would be $770.20 ($3,851 divided by the bond’s 5-year duration).
Straight-Line Amortization of Bond Discount on Annual Financial Statements
If a company only publishes yearly financial statements on December 31, bond discount amortization is frequently reflected when the company makes semiannual interest payments. In our case, the straight-line technique will result in the following journal entries for 2020:
The total interest expense for 2020 will be $9,770 (two semiannual interest payments of $4,500 each + two semiannual bond discount amortizations of $385 each). The entries for the year 2020 are shown in the T-account for Interest Expense:
The T-account below shows how the balance in Discount on Bonds Payable will decrease over the bond’s 5-year tenure.
The bond’s book value will increase from $96,149 on the date the bond was issued to $100,000 at maturity as the bond discount is amortized:
Straight-Line Amortization of Bond Discount on Monthly Financial Statements
The monthly amount of bond discount amortization under the straight-line technique will be $64.18 ($3,851 of bond discount divided by the bond’s life of 60 months) if the corporation releases monthly financial statements. During the year 2020, the 12 monthly journal entries for bond interest and bond discount amortization, as well as the entries for the June 30 and December 31 semiannual interest payments, will result in the following 14 entries:
If all of the bonds remain outstanding, the journal entries for the future years will be similar.