Bonds Payable are always booked at Face Value but we dont always issue them for their Face Value, usually those who purchase our bonds either pay a Premium or Discount.

Scenario:

It takes a while to get approval and print the bonds. At the time they were printed the interest rate printed on the bond was 10%. By the time we go to issue the Bonds, interest rates have gone up to 12%. Nobody will buy our bonds that only pay 10% so we have to adjust the price to give them an EFFECTIVE interest rate of 12%. Even though the interest payments made every 6 months will be at 10%, we adjust the initial price of the bond to exactly what it must be to yield an effective interest rate of 12%.

Journal entries for bonds payable.

BONDS are always booked at FACE. Any difference between Face Value of the bonds and the issue price is recorded in a Bonds Discount (debit) or Bonds Premium (credit) account.

Bond Issue:

Face $1,000,000

Term: 5 years

Contract rate: 10% semiannual (5% every 6 months)

Contract Rate = Market Rate

Your bonds pay 10% when the market rate for similar bonds is also 10%; bonds will issue at Face Value (no discount or premium).

The journal entry to record issuing the bond is:

GENERAL JOURNAL						Page
	Date		Description	Post	Debit	Credit
1							1
2							2

Interest Payment

Semiannually (every 6 months) checks have to be written to the bond holders for their interest payment.

GENERAL JOURNAL						Page
	Date		Description	Post	Debit	Credit
1							1
2							2

Bond Repayment

At the end of the term (Maturity) checks have to be written to the bond holders for their principal repayment.

GENERAL JOURNAL						Page
	Date		Description	Post	Debit	Credit
1							1
2							2