Bond Accounting

What is Bond Accounting?

Bond Accounting means accounting for cash received from the buyer upon issuance of the bond in the balance sheet and its effects on the assets and liabilities side when the bonds are issued at par, premium, or discount. For example, when a bond is issued at par, the cash received is recorded on the asset side, whereas an equal amount is reported on the liabilities side as Bonds payable.

There are three types of bonds.

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Source: Bond Accounting (wallstreetmojo.com)

1. Bond Issued at Par Value – If the market interest rate is equal to the coupon rate, then the bond issue is at Par
2. Bond Issued at Premium – If the market interest rate is less than that of the coupon rate, then the bond issue is at Premium
3. Bond Issued at Discount – If the market interest rate is more than that of the coupon rate, then the bond issues are at a Discount

#1 – Bond Accounting – Par Value Bonds

Here we will take a basic example to understand bond accounting of par value bonds.

#2 – Premium Bonds

Let us take the same example for bond accounting of premium bondsPremium BondsA premium bond refers to a financial instrument that trades in the secondary market at a price exceeding its face value. This occurs when a bond’s coupon rate surpasses its prevailing market rate of interest. For instance, a bond with a face value (par value) of $750, trading at $780, will reflect that the bond is trading at a premium of $30 ($780-750). read more. The only change in the market interest rate is 7%.

Four-year bonds were issued at a face value of $100,000 on January 1, 2008. The coupon rate is 8%. Calculate the issue price of the bond, assuming the market interest rate is 7%

Step 1 – Calculate the Present Value of the Face Value of $100,000.

Step 2 – Calculate the present value of the Coupon Payments of the Bond.

Step 3 – Calculate the Issue Price of the Bond.

• This is the sum total of Present value of Principal + Present value of Interest = 76,290 + 27,098 = 103,387
• Here, the carrying valueCarrying ValueThe carrying value of a bond, also known as the book value or carrying amount of a bond, is the sum of the bond's face value and unamortized premiums (if any) less unamortized discounts (if any) and is usually projected on the issuing company's balance sheet.read more of a bond is not equal to the bonds payableBonds PayableBonds payable are the company's long-term debt with the promise to pay the interest due and principal at the specified time as decided between the parties. A bond payable account is credited in the books of accounts with the corresponding debit to the cash account on the issue date.read more, as this bond is issued at a premium.

The carrying value is found through the following formula:

• Carrying Value = Bonds Payable + Unamortized Premium
• Carrying Value = 100,000 + 3,387 = 103,387

Step 4 – Calculate the Interest Expense and Coupon Payments of the Bond

• Bond Cash Payment = Face Value of the Bonds * Coupon Rate = $100,000 x 8% = 8,000
• Interest Expense (income statement) = Bond Issue Price x  Interest Rate = $103,387 x 7% = $7,237
• Please note that the Interest expense reported in the Income Statement and the Bond coupon payments here are different.
• Also, each year the interest expense changes with the ending amount of bonds payable on the balance sheet.

Step 5 – Calculate the ending Balance Sheet amount of Bonds Payable

• Calculate the ending Balance Sheet amount = Beginning Book Value – Coupon payments + Interest Expense
• Ending Balance Sheet (2008) = 103,387 – 8000 + $7,237 = 102,624
• Likewise, the 2009 Beginning book value will be equal to the ending balance sheet bonds payable amount.

Step 6 – Complete the Bond Accounting table

As we note from the table below, the ending balance amount moves towards the face value of the bond at maturity.

#3 – Bond Accounting – Discount Bonds Payable

Let us take the same example of bonds accounting for discount bondDiscount BondA discount bond is one that is issued for less than its face value. It also refers to bonds whose coupon rates are lower than the market interest rate and thus trade for less than their face value in the secondary market.read more with a market interest rate of 9%.

Four-year bonds were issued at a face value of $100,000 on January 1, 2008. The coupon rate is 8%. Calculate the bond’s issue price, assuming the market price is 9%.

Step 1 – Calculate the Present Value of the Face Value of $100,000.

Step 2 – Calculate the present value of the Coupon Payments of the Bond.

Step 3 – Calculate the Issue Price of the Bond.

• This is the sum total of Present value of Principal + Present value of Interest = 70,843 + 25,918 = 96,760
• Here, the carrying value of a bond is not equal to the bonds payable, as this bond is issued at a discount

The carrying valueThe Carrying ValueCarrying value is the book value of assets in a company's balance sheet, computed as the original cost less accumulated depreciation/impairments. It is calculated for intangible assets as the actual cost less amortization expense/impairments.read more is found through the following formula:

• Carrying Value = Bonds Payable + Unamortized Discount
• Carrying Value = 100,000 – 3,240 = 96,760

Step 4 – Calculate the Interest Expense and Coupon Payments of the Bond

• Bond Cash Payment = Face Value of the Bonds * Coupon Rate = $100,000 x 8% = 8,000
• Interest ExpenseInterest ExpenseInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more (income statement) = Bond Issue Price x  Interest Rate = $96,760 x 9% = 8,708
• Please note that the Interest expense reported in the Income Statement and the Bond coupon payments here are different.
• Also, each year the interest expense changes with the ending amount of bonds payable on the balance sheet.

Step 5 – Calculate the ending balance sheet amount of bonds payable of the first year.

• Calculate the ending Balance Sheet amount = Beginning Book Value – Coupon payments + Interest Expense
• Ending Balance Sheet (2008) = 103,387 – 8000 + $8,708 = 97,469
• Likewise, the 2009 Beginning book value will be equal to the ending balance sheet bonds payable amount.

Step 6 – Complete the Bond Accounting table

As we note from the table below, the ending balance amount moves towards the face value of the bond at maturity.

Recommended Articles

This has been a guide to Bond Accounting. Here we discuss how to account for bonds issued at Par, Discount, and Premium and how it affects the balance sheet, income statement, and cash flows. You may learn more about accounting from the following articles –

• Mortgage Bond
• Bond Futures
• Yankee Bonds
• Bond Yield Formula