Page 598 - Accounting Principles (A Business Perspective)

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2020
Dec. 31 Bond interest expense (-SE) 6,000
Bonds payable (-L) 100,000
Cash (-A) 106,000
To record final interest and bond redemption
payment.
Note that Valley does not need adjusting entries because the interest payment date falls on the last day of the
accounting period. The income statement for each of the 10 years 2010-2018 would show Bond Interest Expense of
USD 12,000 (USD 6,000 X 2); the balance sheet at the end of each of the years 2010-2018 would report bonds

payable of USD 100,000 in long-term liabilities. At the end of 2019, Valley would reclassify the bonds as a current
liability because they will be paid within the next year.
The real world is more complicated. For example, assume the Valley bonds were dated 2010 October 31, issued
on that same date, and pay interest each April 30 and October 31. Valley must make an adjusting entry on
December 31 to accrue interest for November and December. That entry would be:
2010
Dec. 31 Bond interest expense ($100,000 x 0.12 x 2,000
2/12) (-SE)
Bond interest payable (+L) 2,000
To accrue two month's interest expense.
The 2011 April 30, entry would be:
2011
Apr. 30 Bond interest expense ($100,000 x 0.12 x 4,000
(4/12)) (-SE)
Bond interest payable (-L) 2,000
Cash (-A) 6,000
To record semiannual interest payment.
The 2011 October 31, entry would be:
2011
Oct. 31 Bond interest expense (-SE) 6,000
Cash (-A) 6,000
To record semiannual interest payment.
Each year Valley would make similar entries for the semiannual payments and the year-end accrued interest.
The firm would report the USD 2,000 Bond Interest Payable as a current liability on the December 31 balance sheet
for each year.
Bonds issued at face value between interest dates Companies do not always issue bonds on the date they
start to bear interest. Regardless of when the bonds are physically issued, interest starts to accrue from the most
recent interest date. Firms report bonds to be selling at a stated price "plus accrued interest". The issuer must pay
holders of the bonds a full six months' interest at each interest date. Thus, investors purchasing bonds after the
bonds begin to accrue interest must pay the seller for the unearned interest accrued since the preceding interest

date. The bondholders are reimbursed for this accrued interest when they receive their first six months' interest
check.
Using the facts for the Valley bonds dated 2010 December 31, suppose Valley issued its bonds on 2011 May 31,
instead of on 2010 December 31. The entry required is:
2011
May 31 Cash (+A) 105,000
Bonds payable (+L) 100,000
Bond interest payable ($100,000 x 0.12 x 5,000
(5/12)) (+L)
To record bonds issued at face value plus
accrued interest.

Accounting Principles: A Business Perspective 599 A Global Text