Page 602 - Accounting Principles (A Business Perspective)

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The journal entry to record issuance of the bonds is:
2010
June 30 Cash (+A) 95,233
Discount on bonds payable (-L; Contra- 4,767
account)
Bonds payable (+L) 100,000
To record bonds issued at a discount.
In recording the bond issue, Carr credits Bonds Payable for the face value of the debt. The company debits the
difference between face value and price received to Discount on Bonds Payable, a contra account to Bonds Payable.

Carr reports the bonds payable and discount on bonds payable in the balance sheet as follows:
Long-term liabilities:
Bonds payable, 12%, due 2009 June 30 $100,000
Less: Discount on bonds payable 4,767 $95,233
The USD 95,233 is the carrying value, or net liability, of the bonds. Carrying value is the face value of the bonds
minus any unamortized discount or plus any unamortized premium. The next section discusses unamortized
premium on bonds payable.
Bonds issued at a premium Assume that Carr issued the USD 100,000 face value of 12 per cent bonds to

yield a current market rate of 10 per cent. The bonds would sell at a premium calculated as follows:
Cash X Present value =Present value
Flow Factor
Principal of $100,000 due in six interest periods multiplied by
present $100,000 X 0.74622 =$74,622
value factor for 5% from Table A.3 of the Appendix (end of
text)
Interest of $6,000 due at the end of six interest periods
multiplied by 6,000 X 5.07569 =30,454
present value factor for 5% from Table A.4 of the Appendix
(end of text)
Total price (present value) $105,076
The journal entry to record the issuance of the bonds is:
2010
June 30 Cash (+A) 105,076
Bonds payable (+L) 100,000
Premium on bonds payable (+L) 5,076
To record bonds issued at a premium.
The carrying value of these bonds at issuance is USD 105,076, consisting of the face value of USD 100,000

and the premium of USD 5,076. The premium is an adjunct account shown on the balance sheet as an addition to
bonds payable as follows:
Long-term liabilities:
Bonds payable, 12%, due 2009 June 30 $100,000
Add: Premium on bonds payable 5,076 $105,076
When a company issues bonds at a premium or discount, the amount of bond interest expense recorded each
period differs from bond interest payments. A discount increases and a premium decreases the amount of interest

expense. For example, if Carr issues bonds with a face value of USD 100,000 for USD 95,233, the total interest cost
of borrowing would be USD 40,767: USD 36,000 (which is six payments of USD 6,000) plus the discount of USD
4,767. If the bonds had been issued at USD 105,076, the total interest cost of borrowing would be USD 30,924: USD
36,000 less the premium of USD 5,076. The USD 4,767 discount or USD 5,076 premium must be allocated or
charged to the six periods that benefit from the use of borrowed money. Two methods are available for amortizing a
discount or premium on bonds—the straight-line method and the effective interest rate method.

Accounting Principles: A Business Perspective 603 A Global Text