USA Bond Accrued Interest

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When you purchased a bond with accrued interest, do you net out the income with the accrued interest when you received the 1st interest payment? Or do you wait until the bond matures to record either gain or loss and reverse the accrued interest?
 

kirby

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Answer - you record the accrued interest at purchase

If $10,000 bond was issued 1/1/17 and you paid for it 1/1/17, your entry is
DR Investment in bond $10,000
CR Cash <$10,000>

If you bought it later in month and let's say $50 in interest had accrued on it. You have to buy at bond face plus accrued interest (assuming it was sold at face and no premium nor discount)

DR Investment in bond $10,000
DR Accrued interest on bond 50
CR Cash <$10,050>

At month end, bond interest is paid. Let's say $67 of interest

DR Cash $67
CR Accrued interest on bond <50>
CR Bond Interest income <12>
 
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Thanks much. That was how I recorded it. Upon maturity, our investment company sent us a report for the face amount $10,000 and the cost which was $10,050. so there was an unrealized loss which was showing on the statement.
My boss upon maturity suggested to reverse your last JE above and to record below:

DR Cash $10,000
DR Unrealized Loss $67
CR Accrued interest <$50>
CR Investment in bond <$10,000)
CR Bond Interest Income <$17>

We are debating on this.
 

kirby

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Since the report you received showed the face at $10,000 and cost at $10,050, then you paid a premium for the bond and we just have to add that info to the entries

Purchase of $10,000 bond at $50 premium with $51 in accrued interest

DR Invest in bonds $10,000
DR Premium on bond (asset) 50
DR Accrued interest 51
CR Cash <$10,101>

Redemption at maturity, receive face value and $67 interest

DR Cash $10,067
DR Premium expense 50
CR Accrued interest <51>
CR Invest in bonds <10,000>
CR Bond Interest Income <16>
CR Premium on bond <50>

and that makes a LOT more sense than an entry showing "unrealized" loss when indeed it was not a LOSS but an expense - and just a $50 premium expense - not $67 and yes, it is now REALIZED not "unrealized".

But caution on correcting the boss. As the phrase goes " R2. Let the Wookie win." :)
 

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