bonds 4
Transaction Overview
The company receives cash from bond issuance:
Amount: $96,536
Bond issuance includes a discount:
Discount on bonds: $3,000
Discount is considered a contra liability, reducing the total liability.
Accounting for Bonds Issued at Discount
Initial Recording:
Cash received: $96,536.
Discount recorded as a debit: $3,000.
Total liability (net of discount): $96,536 - $3,000 = $93,536.
Amortization of the Discount
Discount amortization over the bond's life:
Amortization Method: Straight line.
Annual amortization: $866.08.
Total amortization periods:
6 months: $866.08
12 months: $866.08
18 months: $866.08
24 months: $866.08
Journal Entries for Amortization
Entries for Discount Amortization:
Interest Expense (increase): $866.08 (recording additional interest expense due to discount).
Credit Discount on Bonds (decrease): $866.08 (reducing the contra liability account).
Bond Characteristics and Market Influence
Bond Payable:
Always recorded at face value: $100,000.
Bond sold at discount affects cash flow but does not change payable amount.
Cash coupon payment: $5,000 periodically as interest.
Net Bond Liability Calculation:
Net value after amortization at 18 months is calculated as:
Face value ($100,000) - Total amortized discount ($3,000) + Amortized amount for periods ($2,598.24).
Interest Expense Calculation
Total Interest Expense consists of:
Cash Interest Paid: $5,000.
Amortized Discount: $866.08 per period.
Total Interest Expense per period includes these components added together.
Price and Interest Rate Relationship
Understanding Price and Interest Rates:
Price of the bond varies inversely with market interest rates.
If market rates rise, bond prices tend to fall.
Conclusion
Periodic interest payment and overall amortization treatment ensure accurate financial reporting and liability management regarding discounted bonds.