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13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds

Bonds Payable​

Bonds are long-term debt securities issued by companies to raise capital.

Bond Life Cycle​

1. Issuance:

  • Company issues bonds to investors
  • Receives cash
  • Records bonds payable

Example:

  • Issue €100,000 bonds at face value, 6% interest

Journal Entry:

510000 Cash                       €100,000
121000 Bonds Payable                          €100,000
To record bond issuance at face value

2. Interest Payments:

  • Pay interest periodically (usually semi-annually)
  • Record interest expense

Example:

  • Semi-annual interest: €100,000 × 6% × 6/12 = €3,000

Journal Entry:

660000 Interest Expense           €3,000
510000 Cash                                    €3,000
To record semi-annual interest payment

3. Maturity:

  • Repay principal at maturity
  • Remove bonds payable

Journal Entry:

121000 Bonds Payable             €100,000
510000 Cash                                   €100,000
To record bond repayment at maturity

Bonds Issued at Discount or Premium​

If Market Rate > Stated Rate:

  • Bonds issued at discount
  • Discount amortized over bond life

If Market Rate < Stated Rate:

  • Bonds issued at premium
  • Premium amortized over bond life

Luxembourg Compliance Note​

Bonds in Luxembourg:

  • Less common for SMEs
  • Must be properly classified
  • Must account for discount/premium
  • Must comply with regulations
  • Must use proper PCN accounts

Think It Through​

What is the difference between bonds issued at face value, discount, and premium? How does this affect interest expense?