Bonds Issued at Par Value

To record a bond issued at par value, credit the "bond payable" liability account for the total face value of the bonds and debit cash for the same amount.

Learning Objective

Explain how a company would record a bond issued a par value

Key Points

Recording a bond issued at par value is a simple process, since there is generally no premium or discount associated with the bond's sale.
To record interest paid on a bond issued at par value, debit the amount paid to the bond interest expense account and credit the same amount to the cash account.
When the bond is paid off, record any final interest payment. Then debit the bond payable account and credit the cash account for the full face value of the bonds.

Terms

no-par value stock
shares issued by a company without a minimum price for which they must be sold
par value stock
shares with a value stated in the corporate charter below which shares of that class cannot be sold upon initial offering
par value
The amount or value listed on a bill, note, stamp, etc.; the stated value or amount.

Example

Consider a 3-year bond with a face value of $1,000 and an effective interest rate of 7%, sold at face value. Since the bond is sold at face value, the proceeds are $1,000. The journal entry would be: Cash $1,000 Bond Payable $1,000The interest payable for each period will be equal to 1,000 x 7%, or $70. The affected accounts will be interest expense and cash, and the journal entry will be as follows: Interest Expense $70 Cash $70At bond expiration, the creditor must make a journal entry for the last interest payment and the retirement of the bond through principal payment. The journal entry would be: Bond Payable $1,000 Cash $1,000

Full Text

Bonds issued at par value are relatively simple to calculate and record. When a bond is issued at par value it is sold for the face value amount. This generally means that the bond's market and contract rates are equal to each other, meaning that there is no bond premium or discount.

The General Ledger

All transactions made by the company in relation to the bond must be recorded in its general ledger. The general ledger contains all entries from both the General Journal and the Special Journals.

When a business issues a bond, it participates in three types of transactions. First, the business issues the bond in exchange for cash. Next, it generally pays interest during the term of the bond. Finally, it pays off the obligation by repaying the face amount and the last interest payment. Each of these transactions must be recorded in the company's financial records with a series of journal entries.

Issuing the Bond

When the bond is issued, the company must record a liability called "bond payable. " This is generally a long-term liability. It is created by recording a credit equal to the face value of all the bonds that are issued. To balance this entry, the company must also debit cash equal to the face value of all the bonds issued. Since the bonds are sold at par value, the amount of cash the company receives should equal the total face value of the issued bonds.

Cash - debit face value (increase cash balance)

Bond payable - credit face value (increase bonds payable)

Interest Payments

When the company makes an interest payment, it must credit, or decrease, its cash balance by the amount it paid in interest. To balance the entry, the company must record a debit equal to the amount it paid in its bond interest expense account.

Bond Interest Expense - debit interest payment (increase interest expense line)

Cash - credit interest payment (decrease cash balance)

Paying Off the Bond

When the bond is paid off, the company must record two transactions. First, it must record any final interest payments that are made. Then, it must record the bond principal being paid off. This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond.

Bond Interest Expense - debit interest payment

Cash - credit final interest payment

Bond Payable - debit face value

Cash - credit face value

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