How to Value Bonds Payable
A company can issue bonds either at face value (also known as par value), which is the principal amount printed on the bond; at a discount, which is less than face value; or at a premium, which means the bond sells for more than its face value. Usually face value is set in denominations of $1,000.
You need the present value tables to help in valuing bonds in the real world. Luckily for your intermediate accounting class, the discussion about bonds references the correct table but gives you the factor so you don’t have to do the heavy lifting yourself.
GAAP prefers the effective interest method when accounting for bonds issued at a discount or a premium. When using the effective interest method, you amortize using the carrying value of the bonds, which is face plus unamortized premium or minus unamortized discount.
GAAP allows the straight-line method if the result is materially the same: straight line versus effective. In fact, your financial accounting class may use only the straight-line method in its chapter on bonds. Keep in mind that International Financial Accounting Standards (IFRS) requires use of the effective interest method.
Issuing bonds at par value is the easiest type of bond transaction to account for. The journal entry to record bonds that a company issues at face value is to debit cash and credit bonds payable. So if the corporation issues bonds for $100,000 with a five-year term, at 10 percent, the journal entry to record the bonds is to debit cash for $100,000 and to credit bonds payable for $100,000.
A bond with a face value and market value of $1,000 has a bond price of 100 (no percent sign or dollar sign — just 100). Bonds issued at premium have a bond price of more than 100. Issued at a discount, the bond price is less than 100.
The rate of interest investors actually earn is known as the effective yield or market rate. If the bond sells for a premium, its market rate is lower than the rate stated on the bond. For example, if the face rate of the bond is 10% and the market rate is 9%, the bond sells at a premium.
On the flip side, if a bond sells at a discount, its market rate is higher than the rate stated on the bond. For example, if the face rate of the bond is 10 percent and the market rate is 11 percent, the bond sells at a discount.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
