What is Bonds Payable?

Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. The account balance increases when an organization sells bonds to investors, and declines when the issuer redeems them.

An entity is more likely to incur a bonds payable obligation when long-term interest rates are low, so that it can lock in a low cost of funds for a prolonged period of time. Conversely, this form of financing is less commonly used when interest rates spike. Bonds are typically issued by larger corporations and governments.

Carrying Value of a Bond

The carrying value of a bond is the amount at which it is reported on the balance sheet. It reflects the bond's face value adjusted for any unamortized premium or discount. The formula for the carrying value of a bond is as follows:

Carrying value = Face value + Unamortized premium − Unamortized discount

For example, a company issues a $100,000 bond at a $2,000 discount. The discount is amortized evenly over five years. At the end of Year 2, $800 of the discount has been amortized. At this point, the carrying value of the bond payable is $98,800, which is calculated as the $100,000 amount of the bond payable, minus the unamortized discount of $1,200.

When the bond discount is fully amortized at the end of five years, its carrying value will equal its face value.

Presentation of Bonds Payable

The bonds payable account typically appears within the long-term liabilities section of the balance sheet, since bonds typically mature in more than one year. If they mature within one year, then the line item instead appears within the current liabilities section of the balance sheet.

Bonds Payable Terms

The terms of bonds payable are contained within a bond indenture agreement, which states the face amount of the bonds, the interest rate to be paid to bond holders, special repayment terms, and any covenants imposed on the issuing entity.