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Chapter 2.5® - Issuing Bonds at Par (100% of Face Value) - Bonds Payable & Interest Expense Journal Entries, Issuing Bonds Between Interest Dates

In this section, we explore the journal entries for bond issuances at par. Consider JJ Corp. receives authorization to issue $900,000 of 6%, 20 year bonds. The bonds are issued on January 1st, 2009 and become due on January 1st, 2029. They pay interest semi-annually each June 30th and December 31st. If the bonds are sold at par, here are the journal entries that JJ Corp. would make in its books.

January 1st, 2009

Account Name

Debit
Credit
Dr. Cash   $900,000  
  Cr. Bonds Payable $1,333 $9,000,000
Entry to record the issuance of $900,000 par bonds at 6% yield & 20 year life term.


On June 30th when it is time to make the interest payment, below is the journal entry.

June 30th, 2009

Account Name

Debit
Credit
Dr. Bond Interest Expense   $27,000  
  Cr. Cash   $27,000
Entry to record payment of Semi-Annual Coupon Interest - $900,000 x 0.06 x 6/12

When the bond matures in 20 years, the company records the following journal entry to fulfill its repayment of the bond payable.

January 1st, 2009

Account Name

Debit
Credit
Dr. Bond Payable   $900,000  
  Cr. Cash   $900,000
Entry to record repayment of $900,000 bond payable at maturity

Issuing Bonds Between Interest Dates

Many bonds are issued on the date when interest is to be paid. This simplifies recordkeeping & administrative costs. However, when a company sells bonds at a date other than interest payment date, the purchasers of bonds are expected to pay the purchase price + any accrued interest since the prior interest payment date. This accrued interest is then repaid to bondholders by the issuing corporation on the next interest date.

For instance, consider Sears Corp has $2,000,000 of 6% bonds available for sale on January 1st, 2009. Interest is payable semi-annually on each June 30th and December 31st. If the bonds are sold at par on March 1st, 2009 (2 months after the original issue date), the issuing company collects 2 months worth of interest from the buyer at the time of sale. This amounts to ($2,000,000 x 6% x 2/12) = $20,000. The entry to record this transaction is:

March 1st, 2009

Account Name

Debit
Credit
Dr. Cash   $2,020,000  
  Cr. Bonds Payable   $2,000,000
Cr. Interest Payable   $20,000
Entry to record issuance of bonds payable with 2 months of accrued interest collected.

When the June 30th semi-annual interest payment date arrives, Sears Corp will pay a full 6 months’ interest of ($2,000,000 x 6% x 6/12) = $60,000 to the bondholder. This payment includes the four months’ of interest earned (from March to June 30th, 2009) plus the repayment of 2 months’ interest collected when the bonds were sold ($20,000). The journal entry to record this is:

June 30th, 2009

Account Name

Debit
Credit
Dr. Interest Payable   $20,000  
Dr. Bond Interest Expense   $40,000  
Cr. Cash   $60,000
Entry to record interest payable semi-annually with 2 months’ of accrued interest.

This is a graph showing the breakdown of the $60,000 of interest payable to bondholders of which $20,000 is the collection of 2 months' interest when the bonds were sold and $40,000 is interest expense for 6 months starting from June 30th, 2009 to December 31st, 2009.

Above is a graph showing the breakdown of the $60,000 of interest payable to bondholders of which $20,000 is the collection of 2 months' interest when the bonds were sold and $40,000 is interest expense for 6 months starting from June 30th, 2009 to December 31st, 2009.

This practice of collecting and then repaying accrued interest with the first interest payment is done to simplify recordkeeping & administration costs for the issuing company. Imagine a company the size of Sears Corp issuing 30 such bonds to different investors; obviously the cost of properly maintaining records for each of these bonds will become a hassle and very costly. If Sears Corp did not collect accrued interest from bondholders, it would need to pay 30 different cash amounts on interest payment dates to 30 different bond investments.

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