Bonds Payable are the long term debt issued by the company with the promise to pay the interest due and principal at the specified time as decided between the parties and is the liability, bond payable account is credited in the books of accounts of the company with the corresponding debit to cash account on the date of issue of the bonds.

## What do we mean by Bonds Payable?

Bonds Payable word can be broken into two parts – bonds and payable. As you can understand bonds are debt. And payable means you are yet to pay that amount. So bonds payable stands for debt that’s not being paid.

To be more specific, **bonds payable is a long-term debt that has still remained outstanding**.

As we note from above, Durect Corp had Bonds payables in its current liability as well as long-term liability sections.

### How does Bonds Payable Work?

A company issues IOU (“I owe you”. An IOU is a signed document acknowledging a debt. This issued IOU is bought by the investors in lieu of cash. In simple terms, the company is borrowing money from the investors by issuing them a legal document that states that the investors would get paid the full amount with the interest in due time.

Two things that we need to pay heed to do in the case of bonds payable –

- First, once the company issues bonds to the investors, the company needs to pay the interest to the bond-holders semi-annually (or every six months). The rate of interest would be decided beforehand and the company needs to pay the pre-determined amount as the interest charges.
- Second, the company also needs to ensure that it pays off the full amount at the time of maturity.

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### Bonds Payable Example

Below is an example of Nike’s Bond of $1 bn and $500 million that were issued in 2016.

source: sec.gov

We note the following about Nike’s Bond.

**Par value –**The amount of money that is paid to the bondholders at maturity. It generally represents the amount of money borrowed by the bond issuer. Bond is issued in the denomination of $1000.**Coupon –**Coupon payments represent the periodic interest payments from the bond issuer to the bondholder. The annual coupon payment is calculated by multiplying the coupon rate by the bond’s face value. As we note from above, Nike’s bond pay interest semiannually, generally one half of the annual coupon is paid to the bondholders every six months**Coupon rate –**The coupon rate, which is generally fixed, determines the periodic coupon or interest payments. It is expressed as a percentage of the bond’s face value. It also represents the interest cost of the bond to the issuer. The coupon rate is 2.375% in the case of $1 billion offer**Maturity –**Maturity represents the date on which the bond matures, i.e., the date on which the face value is repaid. The last coupon payment is also paid on the maturity date. The maturity date is 11/1/2026

### Bond Accounting

Now that we have understood what is bonds payable and see bonds payables examples. Let us now look at Bond accounting and bonds payable on the balance sheet.

There are three types of bonds.

**Bond Issued at Par Value –**If the market interest rate is equal to the coupon rate, then the bond issues is at Par**Bond Issued at Premium –**If the market interest rate is less than that of the coupon rate, then the bond issues is at Premium**Bond Issued at Discount –**If the market interest rate is more than that of the coupon rate, then the bond issues is at a Discount

#### #1 – Bond Accounting – Par Value Bonds

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

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

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

You can use the PV Formula to calculate the present value.

###### 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 = 73,503 + 26,497 = 100,000
- In this case, the Carrying value of the bond is equal to the Bonds Payable.

###### Step 4 – Calculate the ending balance sheet amount of bonds payable of the first year.

- 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 = $100,000 x 8% = 8,000
- Please note that the Interest expense reported in the Income Statement and the Bond coupon payments here are same.

###### Step 5 – Complete the Bond Accounting table

- Calculate the ending balance sheet amount of Bonds payable for each year.
- We note that the ending bonds payable balance sheet amount is same as $100,000 each year as it is par value bond

#### #2 – Bond Accounting – Premium Bonds Payable

Let us take the same example for bond accounting of premium bonds. The only change in the market interest rate is 7%.

Four-year bonds are issued at 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 value of a bond is not equal to the bonds payable, 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, 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 the maturity.

#### #3 – Bond Accounting – Discount Bonds Payable

Let us take the same example of bond accounting for discount bonds with the market interest rate to be 9%.

Four-year bonds are issued at face value of $100,000 on January 1, 2008. The coupon rate is 8%. Calculate the issue price of the bond 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 value 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 Expense (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, 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 the maturity.

### Bonds Payable Video

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