Accounting for Bonds, Part 1 covered the bond
basics. This blog will address issuing a bond at a premium. You’ll see
accounting entries for the issuer (corporation):
Bond issued to the public
When an issuer issues a bond to
the public, the bond is almost always issued for the face amount. That is, the
$1,000 bond is issued for a price of $1,000. There is no premium or discount.
In this case, assume the bond is issued
at a premium of $1,020.
Journal entries for the issuer:
Assume you’ve an issuer-
the one selling the bond to an investor. You issue a $1,000 7% 10-year bond at
a premium of $1,020.
Debit Credit
Cash 1,020
Premium on bond payable 20
Bond payable 1,000
(To
record a $1,000 bond issued at a $20 premium)
The
investor pays you $1,020, which is an increase (debit) to cash. Keep in mind,
however, that the issuer is obligated to pay back $1,000. That $1,000 is the
face amount of the bond. The face amount is paid back at the maturity date (in
10 years). The face amount is also referred to as the principal.
Premium on bond payable:
The
difference between what you must pay at maturity (principal of $1,000) and the
cash you received ($1,020) is the premium on bond payable. Since you
received $1,020, but only have to pay back $1,000, you benefit. That “benefit”
is additional income to you, the issuer.
Amortizing the premium on bond payable:
The issuer recognizes the
income (the premium) over time. The time period is from the date the bond is
issued until maturity. In this case, that’s 10 years. You refer to recognizing
this income as amortization. To keep it simple, you amortize the premium
evenly over 10 years. Based on that method, here is the issuer’s entry after
year one:
Debit Credit
Premium
on bond payable 2
Bond income 2
(To
amortize one year of bond premium)
You
calculate the amount of amortization as:
($20
premium) / (10 years) = $2/year
You’ll
continue with the bond at a premium discussion in the next blog. In the
meantime, here’s a video that might help:
http://www.youtube.com/watch?v=FdwXvHDMUwg
Your comments are welcome! For live chats on
some of the toughest accounting topics, go to my website listed below.
Thanks!
Ken Boyd
St. Louis Test Preparation
(cell) (314) 913-6529
(you
tube channel) kenboydstl
(blog) http://accountingaccidentally.blogspot.com/
(twitter)
@StLouisTestPrep
Author/ Cost Accounting for Dummies (John Wiley and Sons) March 2013
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