Definition of Bonds Payable
Bonds payable is a form of long-term debt often issued by large corporations especially public utilities when constructing large, expensive power plants for generating electricity.
Bonds typically pay interest semiannually at a fixed rate until the bonds mature many years into the future. If the bonds’ interest rate is less than the market rates when the bonds are offered, the bonds will sell at a discount. If the bonds’ interest rate is greater than the market rate when the bonds are offered, the bonds will sell at a premium. Any discount or premium on the bonds is recorded in a separate account. Another account is used to record the bond issue costs such as legal fees, auditing fees, registration fees, etc. These bond-related accounts will be presented in the long-term liability section of the balance sheet. Any balances in the discount, premium, or issue costs accounts must be amortized to interest expense over the life of the bonds.
Example of Recording a Bond Issue
Assume that a corporation issues $100 million of bonds payable at an annual interest rate of 5%. The bonds are offered when the market interest rate is 5.1% and there was no accrued interest. As a result, the investors paid $99.5 million for the bonds. The corporation also incurred $1 million of bond issue costs which were paid from bonds’ proceeds.
The entry to record the issuance of the bonds is:
- Debit Cash for $98.5 million
- Debit Bond Discount for $0.5 million
- Debit Bond Issue Costs for $1 million
- Credit Bonds Payable for $100 million
