 Bonds Issued at Face Value - dummies

Bonds issued at face value are one of 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.

Face value (or face amount) refers to the amount of debt stated on the face of the bond certificate. It represents the amount that must be repaid at maturity. For bonds, par value has the same meaning as face value. This section uses the term face value, because that term refers to the amount stated on the bond certificate.

## Bond pricing

Bond prices are expressed as a percentage of par value (face amount). A bond with a face amount of \$1,000 may have a bond price of 100, or 100 percent of par value (\$1,000). Bonds issued at a premium have a bond price of more than 100.

For example, a price of 102 means 102 percent of par value. In this case, a \$1,000 bond’s price would be \$1,020. A bond priced at 98 (a discount), would have a price of \$980 per \$1,000 bond.

## Calculating interest payments

Interest payments don’t change, regardless of whether the bond is priced at par, a premium, or a discount. To calculate interest payments on a bond, multiply the principal amount by the interest rate stated on the face of the certificate (stated rate).

For example, suppose the stated rate of a bond is 10 percent, interest is to be paid semiannually (every six months), the bonds are issued on July 1, and the first interest payment isn’t due until December 31.

The interest payment is principal multiplied by interest rate multiplied by time; in this case, \$100,000 x 0.10 @@ts @@bf1/2 = \$5,000. So your journal entry on December 31 is to debit bond interest expense for \$5,000 and credit cash for \$5,000.

The interest expense may change, depending on whether the bond is priced at a premium or a discount. However, the cash payment for interest is fixed.