# Bonds Payable

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 Part 1 Introduction to Bonds Payable, Bond Interest and Principal Payments Part 2 Accrued Interest, Bonds Issued at Par with No Accrued Interest Part 3 Bonds Issued at Par with Accrued Interest Part 4 Market Interest Rates and Bond Prices Part 5 Bond Premium with Straight-Line Amortization Part 6 Bond Discount with Straight-Line Amortization Part 7 Calculating the Present Value of a 9% Bond in an 8% Market Part 8 Amortizing Bond Premium with the Effective Interest Rate Method Part 9 Calculating the Present Value of a 9% Bond in a 10% Market Part 10 Amortizing Bond Discount with the Effective Interest Rate Method Part 11 Additional Bond Terminology

## Bonds Issued at Par with Accrued Interest

If a corporation has prepared a bond with a date of January 1, 2012 but delays issuing the bond until February 1, the investors buying the bonds on February 1 will have to pay the issuing corporation one month of accrued interest. (The delay may have been caused by a turbulent financial market or some other situation.)

Let’s illustrate this scenario with a corporation preparing to issue a 9% \$100,000 bond dated January 1, 2012. The bond will mature in 5 years and requires interest payments on June 30 and December 31 of each year until December 31, 2016. The bond is issued on February 1 at its par value plus accrued interest.

Since the bond was sold to investors at par, the issuing corporation will receive 100% of the bond’s face value plus one month of accrued interest. The accrued interest amounts to \$750 (\$100,000 x 9% x 1/12). In total the issuing corporation will receive \$100,750. The journal entry for this transaction is:

 Feb 1, 2012 Cash 100,750
 Bonds Payable 100,000
 Interest Payable 750

Note that the total amount received is debited to the Cash account and the bond's face amount is credited to Bonds Payable. The \$750 received by the corporation for the accrued interest is credited to Interest Payable. The corporation is receiving the \$750 because the corporation is required to pay the bondholders \$4,500 (\$100,000 x 9% x 6/12) on June 30. The difference between the \$4,500 paid on June 30 and the \$750 received on February 1, 2012 is \$3,750—equal to five months of interest for the months of February through June: \$100,000 x 9% x 5/12.

Journal Entries for Interest Expense – Annual Financial Statements
If a corporation that is planning to issue a bond dated January 1, 2012 delays issuing the bond until February 1, the corporation will not have interest expense during January. Assuming the corporation has an accounting year that ends on December 31, it will have eleven months of interest expense during the year 2012. During each of the subsequent years 2013, 2014, 2015, and 2016 the corporation will have twelve months of interest expense equal to \$9,000 (\$100,000 x 9% x 12/12).

If the corporation issues only annual financial statements, its journal entries for its interest payments during the year 2012 will be:

 Jun 30, 2012 Interest Expense 3,750
 Interest Payable 750
 Cash 4,500

 Dec 31, 2012 Interest Expense 4,500
 Cash 4,500

Note that the total amount of interest expense in 2012 will be \$8,250 (\$3,750 recorded on June 30 + \$4,500 recorded on December 31). This amount of interest expense for February 1 through December 31, 2012 is confirmed by the following calculation: \$100,000 x 9% x 11/12 = \$8,250.

In the year 2013, the journal entries will be:

 Jun 30, 2013 Interest Expense 4,500
 Cash 4,500

 Dec 31, 2013 Interest Expense 4,500
 Cash 4,500

In the year 2013, the interest expense will be \$9,000 (\$4,500 + \$4,500 = \$9,000; or \$100,000 x 9% = \$9,000) because the bond will be outstanding for a full year. The entries will be similar for the years 2014, 2015, and 2016.

Journal Entries for Interest Expense – Monthly Financial Statements
If monthly financial statements are issued by the corporation, the following journal entries are needed in the year 2012 (including the entry when the bonds were issued on February 1, 2012):

 Feb 1, 2012 Cash 100,750
 Bonds Payable 100,000
 Interest Payable 750

 Feb 28, 2012 Interest Expense 750
 Interest Payable 750

 Mar 31, 2012 Interest Expense 750
 Interest Payable 750

 Apr 30, 2012 Interest Expense 750
 Interest Payable 750

 May 31, 2012 Interest Expense 750
 Interest Payable 750

 Jun 30, 2012 Interest Expense 750
 Interest Payable 750

 Jun 30, 2012 Interest Payable 4,500
 Cash 4,500

 Jul 31, 2012 Interest Expense 750
 Interest Payable 750

 Aug 31, 2012 Interest Expense 750
 Interest Payable 750

 Sep 30, 2012 Interest Expense 750
 Interest Payable 750

 Oct 31, 2012 Interest Expense 750
 Interest Payable 750

 Nov 30, 2012 Interest Expense 750
 Interest Payable 750

 Dec 31, 2012 Interest Expense 750
 Interest Payable 750

 Dec 31, 2012 Interest Payable 4,500
 Cash 4,500

Note that in 2012 the corporation's entries included 11 monthly adjusting entries to accrue \$750 of interest expense plus the June 30 and December 31 entries to record the semiannual interest payments. As a result of these journal entries, each monthly income statement will report one month of interest expense and the balance sheet will report a current liability for the amount of interest incurred by the corporation but not yet paid to the bondholders.

In each of the years 2013 through 2016 there will be 12 monthly entries of \$750 each plus the June 30 and December 31 entries for the \$4,500 interest payments.

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