Bonds Payable Overview

Bonds Payable

• Bonds payable are long-term liabilities used by companies to raise capital for expansion.
• Bonds are like a loan split into multiple parts, enabling investors to loan the company money.
• The principal (par value) is repaid at maturity, along with periodic interest payments (typically semi-annual).
• Bonds can be issued at par (face value), at a discount (less than face value), or at a premium (more than face value).
• Three types of journal entries are crucial: issuance, interest payment, and maturity.

Issuance Journal Entry

• Records the issuance (sale) of bonds for cash.
• Debit cash for the amount received from the sale.
• Credit bonds payable for the par value of the bonds.

Interest Payment + Discount/Premium Amortization Entry

• Records semi-annual interest payments and amortizing any discount or premium.
• Debit interest expense for the calculated amount.
• Credit cash for the actual interest payment.
• Credit (or debit) discount/premium on bonds payable for the amortization amount.

Maturity Journal Entry

• Records the repayment of the principal at maturity.
• Debit Bonds Payable for the par value of the bond.
• Credit Cash for the principal amount.

Bond Issuance Examples

• Example 1 (At Par):
  • Par value: $1,000,000
  • Coupon rate: 5%
  • Term: 5 years
  • January 1, 2020 issuance entry: Debit Cash $1,000,000, Credit Bonds Payable $1,000,000.
  • June 30, 2020 interest payment entry: Debit Interest Expense $25,000, Credit Cash $25,000.
  • January 1, 2025 maturity entry: Debit Bonds Payable $1,000,000, Credit Cash $1,000,000.
• Example 2 (At Discount):
  • Par value: $1,000,000
  • Coupon rate: 5%
  • Term: 5 years
  • Market rate: 7%
  • January 1, 2020 issuance entry: Debit Cash $970,000, Debit Discount on Bonds Payable $30,000, Credit Bonds Payable $1,000,000.
  • June 30, 2020 interest payment entry: Debit Interest Expense $28,000, Credit Cash $25,000, Credit Discount on Bonds Payable $3,000.
  • January 1, 2025 maturity entry: Debit Bonds Payable $1,000,000, Credit Cash $1,000,000.
• Example 3 (At Premium):
  • Par value: $1,000,000
  • Coupon rate: 5%
  • Term: 5 years
  • Market rate: 3%
  • January 1, 2020 issuance entry: Debit Cash $1,020,000, Credit Bonds Payable $1,000,000, Credit Premium on Bonds Payable $20,000.
  • June 30, 2020 interest payment entry: Debit Interest Expense $23,000, Debit Premium on Bonds Payable $2,000, Credit Cash $25,000.
  • January 1, 2025 maturity entry: Debit Bonds Payable $1,000,000, Credit Cash $1,000,000.

Bond Characteristics

• Determining Discount/Premium: Bonds are issued at a discount when the market rate is higher than the coupon rate, and at a premium when market rate is lower than coupon rate.
• Carrying Value: The carrying value is the book value of bonds—par value adjusted for any discount or premium.
• Total Interest Expense: Calculation examples are included in the provided text.

This quiz covers the fundamentals of bonds payable, including their definition as long-term liabilities and how they function in raising capital. It delves into the journal entries related to bond issuance, interest payments, and the amortization of discounts or premiums. Understand how these elements contribute to effective financial management.