So, how do do the accounting for bonds?

Well, first of all we need to issue bonds, and

we need to go through accounting at the time of issues.

As you might remember we are talking about par bonds.

Under par bonds what do we have?

We have a price of a bond, which is equal to face value.

And similarly we have a bond payable, which is equal to bond face value.

So, at the time of issuance what type of accounting we are going to do?

Obviously, the third borrows money.

There is a cash infusion, cash will go up.

At the same time, the borrower will create a bond payable.

And who's amount will be same as face value.

Let's see an example. Here we have a firm issuing a bond who's

face value is $5,000.

The coupon rate is 10%, but it is going to be paid semi-annually, so every 6 months.

Issue date of this bond is January 1, 2015.

And the life of this bond is five years so the maturity will be five years.

So what is the accounting at the time of issuance.

Obviously at the time of issuance, which is January 1, 2015,

the firm generates $15,000, therefore, cash increases by $15,000.

Similarly, there is a bond payable account created, it also $15,000.

Notice here that we are talking about par bonds, therefore,

we didn't calculate any present value.

All we are doing here is that bond payable amount is same as the face value.

Okay?

Now we did the accounting for issues.

So how do we do the accounting after this time,

because we know that we are dealing with a bond, which is has a life of five years.

Well, we know that bonds have two types of payments.

First there will be period coupon payments.

Under period of coupon payments there will be a reduction from the cash,

because you are paying some interest.

And then you need to record some interest expense on the income statement.

So how do we do this?

We issued this bond January 1, 2015, and

we know that this bond has a coupon rate of 10%, which is paid semi-annually.

Therefore, at the end of the first 6 months, which is June 30,

2015, we need to pay some coupons.

What is the size of this coupon payment?

But we know that face value of this bond is $5,000.

We know that annual coupon rate is 10%, but we know that this

coupon are paid semi-annually, therefore I am dividing this by 2.

And if you do this calculations, you will find that the coupon payment for

every six months is $250.

It is paid to lenders.

And at the same time, we create an interest expense on the income statement,

and notice that it is also $250.

It is in parentheses, it is an expense.

So what happens next?

One more six months pass.

Now, we are at end of year 2015.

Therefore, we need to pay back one more coupon, and

the transaction will be similar.

Again, there is a cash reduction of $250,

and again there is an interest expense of $250.

And you are going to do this for the next five years.

Being though that the coupons are paid semi-annually,

it means that you need to pay ten coupons.