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Since the bonds are sold at par value, the amount of cash the company receives should equal the total face value of the issued bonds. When the company makes an interest payment, it must credit, or decrease, its cash balance by the amount it paid in interest. To balance the entry, the company must record a debit equal to the amount it paid in its bond interest expense account. When the bond is paid off, the company must record two transactions.
First, it must record any final interest payments that are made. Then, it must record the bond principal being paid off. This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond. For the issuer, recording a bond issued at a discount can be a little more difficult than recording a bond issued at par value.
Because the issuer receives less cash for the bond than the face value, this difference must be recorded in the company records as a discount expense. When a bond is sold at a discount, the market rate of the bond exceeds the contract rate. As a result, the bond must be sold at an amount less than its face value.
How to Calculate Interest Expense on Bonds Payable | Bizfluent
In addition, that discounted amount must be amortized over the term of the bond. When the company amortizes the discount associated with the bond, it increases its interest expense beyond what it actually pays to the bondholder. Next, the company debits the cash account by the amount of money it receives from the bond sale. That is the discount amount. The journal entry for that transaction would be as follows:. As the company pays interest, the discount on the bond payable is amortized. Generally, the amortization rate is calculated by dividing the discount by the number of periods the company has to pay interest.
How to Calculate Interest Expenses on a Payable Bond
The journal entry would be:. When the bond matures, the business must record the repayment of the principal to the bondholder, as well as all final interest payments. At this time, the discount on bond payable and bond payable accounts must be zeroed out, and all cash payments must be recorded. The issuing company will still be required to pay the bondholder the interest payments guaranteed by the bond. When the bond is issued, the company must debit the cash account by the amount that the business receives for the bond sale. The difference between the cash from the bond sale and the face value of the bond must be credited to a bond premium account.
The resulting journal entry would be:. When the business pays interest, it must also amortize the bond premium at that time. To calculate the amortization rate of the bond premium, a company generally divides the bond premium amount by the number of interest payments that will be made during the term of the bond. Every time interest is paid, the company must credit cash for the interest amount paid to the bond holder.
The company must debit the bond premium account by the amortization rate. The resulting journal entry is:. When the bond reaches maturity, the company must pay the bondholder the face value of the bond, finish amortizing the premium, and pay any remaining interest obligations. When all the final journal entries are made, the bond premium and bond payable account must equal zero.
A zero-coupon bond is one that does not pay interest over the term of the bond. Instead, the entity will sell the bond at lower than face value. While the business may not make periodic interest payments, interest income is still generated. Generally, the price of a zero-coupon bond is based on the present value of the amount the issuing business will pay the bondholder when the bond matures. The present value is determined using the interest rate stated on the bond. It is important when completing the zero-coupon bond calculation to ensure the time period and term of the bond are expressed in similar terms.
If the interest rate of the bond is expressed as a monthly rate and the term of the bond is 10 years, the bond term should be expressed as months when making the calculation. To calculate its present value, you would raise 1. This equals 1. Skip to main content. Reporting of Long-Term Liabilities. Search for:. Key Terms discount rate : The interest rate used to discount future cashflows of a financial instrument; the annual interest rate used to decrease the amounts of future cashflows to yield their present value.
The rights of the holder are specified in the bond indenture, which contains the legal terms and conditions under which the bond was issued. Bonds are available in two forms: registered bonds and bearer bonds. Learning Objectives Summarize how a company would calculate the value of their bonds. Key Takeaways Key Points When calculating the present value of a bond, use the market rate as the discount rate.
Index Definition and Calculations of Value and Returns. Aggregate Demand, Aggregate Supply, and Equilibrium. Context for Assessing Financial Reporting Quality. Determining the Tax Base of Assets and Liabilities. Portfolio Expected Return and Variance of Return. Prices and Yields: Conventions for Quotes and Calculations.
Pricing of Risk and Computation of Expected Return. Trade and Capital Flows: Restrictions and Agreements. Point and Interval Estimates of the Population Mean. The Relationship between Monetary and Fiscal Policy. Evaluating Solvency: Leverage and Coverage Ratios. Recognition and Measurement of Current and Deferred Tax. Risk and Return Characteristics of Equity Securities. Remember me. Forgot your Password? Back to Log In.
Slide Anything shortcode error: A valid ID has not been provided. R21 Financial Statement Analysis. Introduction 2. Scope of Financial Statement Analysis 3. Financial Statement Analysis Framework. R22 Financial Reporting Mechanics. The Classification of Business Activities 3. Accounts and Financial Statements 3. Financial Statement Elements and Accounts 3. Accounting Equations. The Accounting Process. Accruals 5. Valuation Adjustments. Accounting Systems. Using Financial Statements in Security Analysis 7. The Use of Judgment in Accounts and Entries 7.
R23 Financial Reporting Standards. The Objective of Financial Reporting 3. Standard Setting Bodies and Regulatory Authorities 4. Convergence of Global Financial Reporting Standards 5. Effective Financial Reporting 7. Monitoring Developments in Financial Reporting Standards. R24 Understanding Income Statements. Components and Format of the Income Statement 3. Revenue Recognition 3. General Principles 3. Revenue Recognition in Special Cases 3. Implications for Financial Analysis 3.
Expense Recognition 4. General Principles 4. Issues in Expense Recognition 4.
Implications for Financial Analysis. Discontinued Operations 5. Extraordinary Items 5. Unusual or Infrequent Items 5.
Changes in Accounting Policies 5. Non-Operating Items. Simple versus Complex Capital Structure 6. Basic EPS 6. Diluted EPS. Analysis of the Income Statement. Comprehensive Income. R25 Understanding Balance Sheets. Components and Format of the Balance Sheet 3. Current Assets and Current Liabilities 3.
Current Assets 3. Current Liabilities. Property, Plant and Equipment 4. Investment Property 4. Intangible Assets 4. Goodwill 4. Financial Assets. Non-Current Liabilities. Components of Equity 6. Statement of Changes in Equity. Common-Size Analysis of the Balance Sheet 7. Balance Sheet Ratios.
R26 Understanding Cash Flow Statements. Components and Format of the Cash Flow Statement 2. Steps in Preparing the Cash Flow Statement 3. Evaluation of the Sources and Uses of Cash 4. Cash Flow Ratios. R27 Financial Analysis Techniques. The Financial Analysis Process 2. The Objectives of the Financial Analysis Process 2. Distinguishing between Computation and Analysis. Analytical Tools and Techniques 3. Ratios 3. Common-Size Analysis 3. The Use of Graphs as an Analytical Tool 3.
Regression Analysis. Common Ratios Used in Financial Analysis 4. Interpretation and Context 4. Activity Ratios 4. Liquidity Ratios 4. Solvency Ratios 4.