Bonds Issued Between Interest Dates

Discussion in 'Accounting Software' started by Salomon, Jul 10, 2003.

  1. Salomon

    Salomon Guest

    According to Kieso & Weyngandt, when a bond is issued at par between
    interest dates the following journal entry is made:

    Issuer

    Cash XX
    Bonds Payable XX
    Bond Int. Exp. XX


    My question is: shouldn't bond interest payable be credited intsted of
    bond interest expense?
     
    Salomon, Jul 10, 2003
    #1
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  2. Salomon

    jake johnson Guest

    According to Kieso & Weyngandt, when a bond is issued at par between
    No, Bond Interest Payable doesn't figure into this scenario. What's
    hapenning here (from the perspective of the company issuing the bond)
    is that they receive cash from the purchaser equal to bond face value
    plus the amount of interest the bond earned from issue date before its
    purchase. The purchaser will, remember, be receiving an interest
    payment for a period from the date of issue and this way he's paying
    it back partially (but in advance). Note that date of issue is a date
    before the date of purchase since we're referring to the scenario
    where a bond is sold between interest dates (although you've stated
    'issued between interest dates'). So, realize that it was 'issued'
    before it was 'sold' and the interest clock starts on the issue date.

    Bond Interest Payable is actually very simple. Its when the issuing
    company owes an interest payment to the issuer based on the passage of
    time (a due date passes) and simply hasn't paid in cash yet. Its an
    Account Payable to the bond purchaser.

    - Jake
     
    jake johnson, Jul 17, 2003
    #2
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  3. Salomon

    helpwithias

    Joined:
    Mar 29, 2009
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    Hi salomon and Jake,

    Both are accepted methods as they provide same impact in the financial statements. Look at the example below:

    Issuer issues bonds on April 30 (Interest payments are every Jan 1 and Jul 1). This means there is accrued interest equal to 4 months (Jan 1 to April 30)

    A) Crediting Bond Interest Expense
    1. On date of issue, issuer makes this entry:

    Dr. Cash
    Cr. Bonds payable
    Cr. Bonds interest expense (4 months)

    2. On date of interest payment, issuer makes this entry:

    Dr. Bonds interest expense (6 months)
    Cr. Cash

    The net effect in interest expense is 2 months.

    B) Crediting Bond interest payable

    1. On date of issue, issuer makes this entry:

    Dr. Cash
    Cr. Bonds payable
    Cr. Bonds interest payable (4 months)

    2. On date of interest payment, issuer makes this entry:

    Dr. Bonds interest payable (4 months)
    Dr. Bonds interest expense (2 months)
    Cr. Cash

    The net effect in interest expense is 2 months.

    Both methods, again, are acceptable. But I prefer crediting Interest expense because it's less of a hassle. That's how we usually do it here in the Philippines. Good luck!
     
    helpwithias, Mar 29, 2009
    #3
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