SeniorMotion & Trivsel Vordingborg

The 8% market rate of interest equates to a semiannual rate of 4%, the 6% market rate scenario equates to a 3% semiannual rate, and the 10% rate is 5% per semiannual period. This carrying amount of bonds payable on balance sheet is what the issuer will get from the investor when the bond is issued. On maturity, due to amortization of premium/discount, the carrying value will become same as face value on the debt instrument. Adhering to accounting standards like GAAP or IFRS, companies must disclose the amortization method and interest expense in their financial statements. Detailed footnotes often explain the nature of bond discounts, the chosen amortization strategy, and any assumptions used in the calculations. These disclosures enhance transparency and ensure consistency across reporting periods, helping stakeholders make informed decisions.

So issuing bonds is a way of raising larger amounts of finance from multiple investors. Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. Bonds are referred to as units of corporate debt that are mostly securitized as tradeable assets. It can be classified as a fixed income instrument because a fixed interest rate is paid to the issuing party in most cases.

So, we have this liability to pay $2,250, for the 6 months that have passed. The discount on bonds payable is going to keep decreasing here, right? The principal portion of the bond is recognized as a discount on bonds payable balance sheet bond payable in the liabilities section of the balance sheet.

Bond Issue at Par Value

• Notice that interest expense is the same each year, even though the net book value of the bond (bond plus remaining premium) is declining each year due to amortization.
• The present value of the maturity amount will be calculated next.
• Let’s illustrate this scenario with a corporation preparing to issue a 9% $100,000 bond dated January 1, 2024.
• The periodic interest is an annuity with a 10-period duration, while the maturity value is a lump-sum payment at the end of the tenth period.

Under the straight-line method the interest expense remains at a constant amount even though the book value of the bond is increasing. The accounting profession prefers the effective interest rate method, but allows the straight-line method when the amount of bond discount is not significant. When a bond is sold at a discount, the amount of the bond discount must be amortized to interest expense over the life of the bond. It is reasonable that a bond promising to pay 9% interest will sell for less than its face value when the market is expecting to earn 10% interest.

This method of accounting for bonds is known as the straight-line amortization method, as interest expense is recognized uniformly over the life of the bond. Notice that interest expense is the same each year, even though the net book value of the bond (bond plus remaining premium) is declining each year due to amortization. Another way to illustrate this problem is to note that total borrowing cost is reduced by the $8,530 premium, since less is to be repaid at maturity than was borrowed up front. The entire transaction of bonds payable on balance sheet is recorded affecting different accounts in balance sheet of the company. Now let us look at the procedure to record the transaction in books of accounts.

Can Companies Issue Stock to Pay Debt?

And when I say amortization, we’re going to be amortizing that discount. We had a discount of $3,000 and we’re going to amortize it over the life of the bond into interest expense, okay? I’m going to show you what that means in a second, but I want to make a note to you. But in this class, it’s very easy and they generally use it because most of the time it’s not so different from the GAAP method. Now if your teacher is really enthusiastic and really wants to teach you the more difficult method, we’re going to have a video on that method as well. Just make sure whether your teacher is going to focus on straight line, effective interest method, or both.

📆 Date: May 3-4, 2025🕛 Time: 8:30-11:30 AM EST📍 Venue: OnlineInstructor: Dheeraj Vaidya, CFA, FRM

Retirement of bonds is the process of a business repaying the amount of the bond to the investors. Retirement of bonds normally happens when the bond reaches its maturity date, but can happen at an earlier date if the terms of the bond permit. A premium or a discount may arise on the early retirement of bonds. Every 6 months the discount on the bonds payable is amortized over the life of the bond and a debit taken to the interest expense account. In addition, every 6 months the premium on the bonds payable is amortized over the life of the bond, and a credit for this is taken to the interest expense account. The bond coupon rate is the interest rate that the issuer pays to the holder of the bond (the investor).

And what that’s going to be doing is going to be increasing the value of the bond as we keep crediting to these liabilities. We’re going to credit discount on bonds payable, and I’m going to put discount on BP for bonds payable. So we’re going to be crediting the discount account because remember, up here, when we first issued the bonds, it had a debit balance, right? We issued them with a debit balance in the previous video and now we’re going to be crediting it to get rid of that debit balance. So we had that debit balance of 3,000 and we’re going to be amortizing it over the 10 interest payments, 5 years twice per year. We’re going to be amortizing it 300 per period, so we’re going to have a credit of 300.

Amortization of Discount on Bonds Payable

Bonds Payable usually equal to Bonds carry amount unless there is discounted or premium. Thus, Schultz will repay $31,470 more than was borrowed ($140,000 – $108,530). The present value factors are taken from the present value tables (annuity and lump-sum, respectively).

• Bonds are transferable, and an investor can sell their bond before the maturity date.
• On July 1, 2019, ABC Corporation issued bonds worth $10,000 for a ten-year period with a coupon rate of 10% and semi-annual payments.
• Many companies use accounting software to streamline this process, reducing the risk of manual errors.
• Under the straight-line method the interest expense remains at a constant amount even though the book value of the bond is increasing.

Company will discount to attract investors when the coupon rate is lower than the market rate. Thus, Schultz will repay $47,722 ($140,000 – $92,278) more than was borrowed. Spreading the $47,722 over 10 six-month periods produces periodic interest expense of $4,772.20 (not to be confused with the periodic cash payment of $4,000).

This discount arises from factors such as prevailing interest rates, the issuer’s credit rating, or market conditions. The difference between the bond’s face value and its issuance price is recorded as a discount on bonds payable, which is amortized over the bond’s life. This process reduces the discount over time, aligning the bond’s book value with its face value by maturity.

The effective interest method is commonly used to amortize the discount, ensuring the interest expense recognized in each period reflects the bond’s carrying amount and the market interest rate at issuance. For example, if a bond with a face value of $1,000,000 is issued at $950,000, the $50,000 discount is amortized over the bond’s term, impacting the interest expense recorded in financial statements. We’ve amortized it to interest expense over the life of the bond. So our bonds payable is showing a value of $50,000 and that’s what we’re going to pay off right now. We’re gonna debit bonds payable for $50,000 on the maturity date and that gets rid of the liability, right?

These costs are referred to as issue costs and are recorded in the account Bond Issue Costs. Beginning in 2016, the unamortized amount of the bond issue costs are reported as a deduction from the amount of the liability bonds payable. Over the life of the bonds the bond issue costs are amortized to interest expense. To illustrate the discount on bonds payable, let’s assume that in early December 2023 a corporation prepares a 9% $100,000 bond dated January 1, 2024.

Let’s go ahead and do a practice problem before we move on to premium on bonds payable. Regularly, a bond’s value is not equal to its current market price at the date of issuance. Bonds will have a stated rate of interest dictating the value of the periodic interest payments. However, market interest rates change frequently, so the interest rate stated on the bond may be different from the current interest rate at the time of bond issuance. Therefore, bonds sold below the current market value are issued at a discount while bonds issued above the current market value are at a premium.