Accounting for bonds
/What is a Bond?
A bond is a fixed obligation to pay that is issued by a corporation or government entity to investors. Bonds are used to raise cash for operational or infrastructure projects. Bonds usually include a periodic coupon payment, and are paid off as of a specific maturity date.
How to Account for a Bond
The accounting for bonds involves a number of transactions over the life of a bond. The accounting for these transactions from the perspective of the issuer is noted below.
Accounting for Bond Issuance
When a bond is issued at its face amount, the issuer receives cash from the buyers of the bonds (investors) and records a liability for the bonds issued. The liability is recorded because the issuer is now liable to pay back the bond. The journal entry is:
Debit | Credit | |
Cash | xxx | |
Bonds payable | xxx |
If investors buy the bonds at a discount, the difference between the face value of the bonds and the amount of cash received is recorded in a discount on bonds payable account. This happens when investors want a higher return on their investment. The entry would be:
Debit | Credit | |
Cash | xxx | |
Discount on bonds payable | xxx | |
Bonds payable | xxx |
If investors buy the bonds at a premium, the difference between the face value of the bonds and the amount of cash received is recorded in a premium on bonds payable account. This happens when investors are willing to accept a lower return on their investment, because the stated interest rate is higher than the market interest rate. The entry would be:
Debit | Credit | |
Cash | xxx | |
Premium on bonds payable | xxx | |
Bonds payable | xxx |
There may be a variety of bond issuance costs, such as commissions, legal expenses, printing costs, and registration fees. These costs are recorded in an asset account, and then charged to expense on a straight-line basis over the term of the bond. The initial entry would be: