Bonds are issued at their market price, which could
mean their par or face value.
It could also mean at a premium, if the market interest
rate is less than the stated interest rate.
Issuing bonds at a premium means selling them
for more than their face value.
Finally, it could mean at a discount,
if the market interest rate is greater than the stated
interest rate of the bond.
Issuing bonds at a discount means selling them
for less than their face value.
The journal entry to issue bonds at par is a debit to cash
and a credit to bonds payable.
A bonds payable account is a long term liability.
In this example, New Order issues $100,000 bonds of par.
So the journal entry is a debit to cash and a credit to bonds
payable for $100,000.
When a bond's stated interest rate is less than the market,
the bond will be sold for less than face value.
We call this a discount, and we use a new account,
discount on bonds payable, which is a contra-liability account.
This means in order to use the account, discounts on bond
payable, we must be using an account bonds payable.
Also discount on bonds payable has a normal debit balance,
which is different than regular liability accounts.
In this example, New Order issues $100,000
of bonds at a $10,000 discount.
So journal entry is to debit cash for $90,000,
debit the discount on bonds payable for $10,000,
and credit bonds payable for $100,000.
Actually a better example might look like this.
New Order issued $100,000, 5% bonds at 96.
The issue price is $100,000 times 96%,
which equals $96,000.
So we debit cash for $96,000.
We debit discounts on bond payable for $4,000,
and credit bonds payable for $100,000.
Then over the life of the bond, the discount balance
would be reduced to zero.
We call this process amortizing the discount,
and you'll learn more about that in an upcoming video.
Finally, let's look at the balance sheet presentation
of the bonds payable after issuance.
Bonds payable is a $100,000.
Discount on bonds payable is shown as negative.
But accounts don't have negative balances.
So this just means it is reducing
the value of the carrying value of the bond.
It also means that discounts have debit balances and debit
balances reduce liabilities.
The net amount is often called a bonds carrying value.
OK.
When bond's stated interest rate is greater than the market
rate, the bond will be sold for more than its face value.
We call this a premium, and we use a new account, premium
on bonds payable, which is an adjunct liability account,
or I think that's still what it is called.
I haven't actually heard that term in over 20 years.
Premium on bonds payable has a normal credit balance,
which is a characteristic of an adjunct liability account.
OK.
So let's look at an example.
New Order issues $100,000, 5% bonds at 108.
The issue price is $100,000 times 108%,
and that equals $108,000.
So we debit cash for $108,000.
We credit premium on bonds payable for $8,000
and credit bonds payable for $100,000.
Then over the life of the bond the premium balance
would be reduced to zero.
And let's look at the balance sheet presentation of the bond
after issuance.
Bond payable is $100,000.
The premium on bond is $8,000.
This adds to the bond carrying value
because premiums have credit balances.
Bonds, like other debts, need to be paid back.
Unlike many other debts, bonds don't
pay off the principal amount until the end of the bond term.
So in this example, New Order retires
$100,000 of bonds at maturity.
The journal entry is a debit to bonds
payable, thus paying off a liability
and removing it from the books, and a credit
to cash for $100,000.