When bonds are issued at a discount, an entry called “Discount on bonds payable” is created which gets amortized with future payments, etc. Same thing with bonds issued at a premium, called “Premium on bonds payable”. Question: Where are these done? Under assets or liabilities?
dreary, from what I remember for LI…if a bond is issued at a discount / premium it is reflected as such on the b/s. for example a $1,000 bond issued for $990…thus Long Term Debt on the b/s is $990 and it increases as it gets closer to maturity. (vice versa for premium) there isn’t a different account on the b/s for them.
Dreary, It sounds like you are looking for the correct debit/credit journal entries. However, are you looking for the correct journal entries from the standpoint of the issuer of the bond, or the purhaser (i.e., investor) of the bond?
BCH, in your example, it is entered as $1000 Bonds Payable, $990 cash, plus an entry for the discount, see below. cadlag, no, the journal entries are straightforward, what I want to know is how to balance the balance sheet. For discount bonds: Where does Discount on bonds payable get recorded on B/S, A or L? Cash … $9800 Discount on bonds payable…$2000 … Bonds payable …$10,000 For Premium bonds: Where does premium on bonds payable get recorded on B/S, A or L? Cash … $102,000 …Premium on bonds payable…$2000 … Bonds payable …$10,000 I have a guess, but would like to hear it from those who know this accounting stuff like the back of their hands.
Both these accounts are what are called “Contra” accounts from an accounting terminology. Since they are appended to the Liabilities - these are Contra liabilities.
cpk, that was my thinking but my understanding is that a contra account has a negative sign which reduces the amount of the liability or asset. The problem here is that this works ok for bonds issued at a discount, but not for bonds issued at a premium.
dreary the journal entries would just be cash…9800 bonds payable…9800
nope… that is for a par bond… if premium DR cash 1100 CR Bond Payable 1000 CR Premium on Bond Payable 100 For a Discount Bond DR Cash 900 DR Discount on Bond Payable 100 CR Bond Payable 1000 So if you look at it… Premium on Bond Payable is a Contra Asset Discount on Bond Payable is a Contra Liability. Premium on Bond Payable reduces to 0. Discount On Bond Payable increases to 0.
> So if you look at it… Premium on Bond Payable is a Contra Asset > Discount on Bond Payable is a Contra Liability. That begins to make some sense (I haven’t read the link you pointed to), but it would have to be such that premiums are recorded as a contra asset, and discounts are a contra liability. The only thing that remins is … premium on Bond Payable is a Contra asset account to what? The discount is clearely a contra liability to Bonds Payable. A contra account can’t just hang in there on its own! It’s contra to something.
Think of it as being contra to the same account…bonds payable. The effect is to report your LTD net of any discount or premium. What I’m forgetting is the I/S impact and calculation of interest expense. 1) Do we take the yield at time of issuance multiplied by the net book value of debt to get to interest expense? 2) In the case of a premium, that would result in my interest expense being lower than my cash payment? 3) Is the cash payment treated as CFO or is the portion for premium treated as CFF?
> Think of it as being contra to the same account…bonds payable. The effect is to report your LTD net of any discount or premium. That won’t work because you have to have A=L+E > What I’m forgetting is the I/S impact and calculation of interest expense. > 1) Do we take the yield at time of issuance multiplied by the net book value of > debt to get to interest expense? yes. > 2) In the case of a premium, that would result in my interest expense being > lower than my cash payment? Interest expense will be higher in this case because BV is high (it’s issued at a premium). > 3) Is the cash payment treated as CFO or is the portion for premium treated > as CFF? Interest payment is treated as CFO, (The bond issued at a premium that you mentioned would have (say) interest payment of $5000 but interest expense of $5700. What gets recorded as CFO is the $5000. The entire amount received is CFF inflow, and when paid later, it’s CFF outflow. IFRS does it same way except you have flexibility in making the interest payment CFF.
dreary == read the link in the Principles of accounting text book. Reporting is Bond Payable XXXX Plus: Unamortized Premium on Bond Payable YYYY both of which are reported on the Liab side Unamortized premium account is an adjunct" account. Bond Payable XXXX Less: UnAmortized Discount on Bond Payable (YYYY) both of which are again reported on the liability side. Unamortized Discount is a Contra account.
Oh, your questions raised another issue. What gets recorded on the I/S? [Someone confirm this for me please.] If your interest payment (based on coupon) is $5000, and interest expense is $5700 (based on market rate * net BV), then you record $5700 as interest expense. If so, then you have an extra $700 noncash included in interest expense. To derive CFO, you would have to subtract $700 to determine CFO? It’s been a while…
That makes perefect sense cpk.
the amortization expense would show up with the (700) for the premium amortization in your example. CFO = NI (which had the extra 700 included) + Depreciation + Amortiztion (-700) so net effect cancels out. When it is a discount -> 5000 Interest coupon, 4500 Interest expense on I/S +500 Amortization expense. And that will now get added back to CFO.
Sales = $100k COGS = $60k Deprec. = $5k Int Expense = $4.5k ------------------------- Income= $30.5k CFO = $30.5k + $5k + $0.5k = $36k But where on the I/S do you see the $500 bond amortization? (same with the $700 amortization as well)
A separate row would show up with Amortization … another line item like Depreciation.
Great, I think we beat this one to death, lets move on. I’m on to SS 7.
> That won’t work because you have to have A=L+E Still works, asset is always cash. Premium increases L while discount decreases. > > 2) In the case of a premium, that would result > in my interest expense being > > lower than my cash payment? > > Interest expense will be higher in this case > because BV is high (it’s issued at a premium). 2) When I’m at a premium I don’t understand how reported interest expense is higher when yield at issuance is lower than coupon rate and I’m amortizing the premium against expense over the life of the loan. 2 year bond, semi-annual, 100par, 5$ semi-annual coupon, 5% yield at issuance PV= 109.4 First 6 month interest expense = $2.74 (.05/2*109.4) First 6 month cash payment = $5 is this right? and to confirm, there is no CFF impact until principle payment (just seems strange to me)