Issuance of Bonds Payable at Par
When a bond’s coupon rate is equal to the market interest rate, investors will purchase it at at its par i.e. its face value which is the amount the bond issuer has to pay back to the investors at the end of the term of the bond. Bonds issued at par are issued for consideration exactly equal to the principal amount of the bond.
Accounting for bonds payable issued at par is simple because it does not involve initial recognition of any bond discount or premium. Recognition of periodic interest expense on the bond is also simple because there is no amortization of bond discount or premium.
Journal Entries Example
Company F has issued 100,000 bonds of $1,000 face value each on 1 January 2012. These bonds have a maturity period of 5 years and carry a coupon rate of 8% paid annually. The market interest rate at the time of issue was exactly 8%. The market interest rate prevailing now is 9%.
Issuance Journal Entry
Since there is no difference between the coupon rate on the bond and the interest rate prevalent in the market at the time of the issue, the bonds will be issued at par.
Company F shall account for the transaction as follows:
|Bonds Payable||100 M|
Any subsequent changes in market interest rate with reference to the coupon rate do not effect the carrying amount of the bond in the books of the issuer.
Interest Expense Journal Entry
The annual payment the bond issuer is required to make on the bond is called coupon payment.
|Coupon Payments = FV ×||c|
FV = face value of the bond i.e. the principal amount
c = annual coupon rate, i.e. the stated or contract interest rate
n = number of coupon payments per year
In case of Company F, coupon payment is $8,000,000 (=8% ÷ 1 × $100,000,000).
Since there is no discount or premium, the interest expense in case of a bond issued at par is equal to the coupon payment.
Company F shall record the recognition of bond interest expense and the payment of coupon payment as follows:
|Interest Expense||8 M|
Company F shall make five such coupon payments which shall be recognized as above.
Retirement of Bonds Journal Entry
At the maturity, a bond issuer is liable to pay back the principal amount to the investors. This extinguishes its liability towards the investors. Retirement of bonds involve cash outflow equivalent to the face value of the bond.
After 5 years Company F will repay the bonds and record it as follows:
|Bonds Payable||0.1 M|