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The Corporate Finance Institute Accounting
On January 1, 2017:
DR Cash: 860,653
CR Bond Payable: 860,653
The issuance of the bond is recorded in the bonds payable account. The
$860,653 value means that this is a premium bond and the premium
will be amortized over its life.
On December 31, 2017:
DR Interest Expense: 86,065
DR Bond Payable: 9,935
CR Interest Payable: 96,000
The interest expense is the bond payable account multiplied by the
interest rate. The interest payable is a temporary account that will be
used because payments are due on January 1st of each year. And finally,
there is a decrease in the bond payable account that represents the
amortization of the premium.
Therefore, on the balance sheet, the accounts would look like:
Bond Payable: $850,718
Interest Payable: $96,000
On January 1, 2018:
DR Interest Payable: 96,000
CR Cash: 96,000
Finally, the interest payable account is removed because cash is paid
out. This payment represents the coupon payment that is part of the
bond.
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