How To Record Journal Entries Correctly For Bonds Issued At A Discount Or A Premium? Hint: Follow The Money

Abstract

A factor that complicates the posting of the journal entries related to the issue of bonds is that the amount of money received by the issuing company may be different from the face value of the bond. If the bond stated rate is higher than the market interest rate at the time of issue of the bond, the company can sell the bond at a premium; on the other hand, if the stated rate is lower than the market interest rate, the company will be forced to sell the bond at a discount.  Another complicating factor is that the issuing company has to make interest payments at regular time intervals throughout the life of the bond and a final payment on the date of the maturity of the bond. Many students of Accounting, especially at the undergraduate level, find the journal entries related to the treatment of bond discounts and premiums very confusing, since they are spread over many years, spanning the entire life of the bond, unlike the numerous other journal entries covering the annual operating activities of the company. In this paper, some hints and guidelines are provided with the goal of helping the studentsrecord the journal entries correctly when bonds are sold at a discount or a premium.