The costs associated with issuing bonds should be matched to the accounting periods that will benefit from the bonds. For example, if a corporation incurs bond issue costs of $150,000 in order to issue $5,000,000 of bonds maturing in 15 years, the corporation should report an annual Bond Issue Costs Expense of $10,000 ($150,000 divided by 15 years).

Since the corporation must pay the bond issue costs of $150,000 when the bonds are issued, but can expense only $10,000 per year, the bond issue costs need to be deferred to a long-term asset account. In effect the bond issue costs are prepaid expenses, which are part of the definition of assets. (Recall, that the payment of a 6-month or 12-month insurance premium is reported as a current asset until it expires and is then expensed.)

The journal entry for the bond issue costs will initially be a debit of $150,000 to Bond Issue Costs and a credit to Cash or Accounts Payable. Then each year that the bonds are outstanding there needs to be an accounting entry to credit Bond Issue Costs for $10,000 and to debit Bond Issue Costs Expense. This is referred to as amortization and it results in the balance in the long-term asset account Bond Issue Costs being reduced to $0 by the time the bonds mature.

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