CHAPTER15
Long-Term
Liabilities
Acct202
15-1
PreviewofCHAPTER15
15-2
Bond Basics
Bonds are a form of interest-bearing notes payable.
Three advantages over common stock:
1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share may be higher.
15-3
SO 1 Explain why bonds are issued.
Bond Basics
Effects on earnings per share—stocks vs. bonds.
Illustration 15-2
15-4
SO 1 Explain why bonds are issued.
Bond Basics
Question
Major disadvantages resulting from the use of bonds are:
a. that interest is not tax deductible and the principal
must be repaid.
b. that the principal is tax deductible and interest must
be paid.
c. that neither interest nor principal is tax deductible.
d. that interest must be paid and principal repaid.
15-5
SO 1 Explain why bonds are issued.
Bond Basics
Types of Bonds
15-6

Secured and Unsecured (debenture) bonds.

Term and Serial bonds.

Registered and Bearer (or coupon) bonds.

Convertible and Callable bonds.
SO 1 Explain why bonds are issued.
Bond Basics
Issuing Procedures
15-7

State laws grant corporations the power to issue bonds.

Board of directors and stockholders must approve bond
issues.

Board of directors must stipulate number of bonds to be
authorized, total face value, and contractual interest rate.

Bond contract known as a bond indenture.

Paper certificate, typically a $1,000 face value.
SO 1 Explain why bonds are issued.
Bond Basics
Issuing Procedures

15-8
Represents a promise to pay:
►
sum of money at designated maturity date, plus
►
periodic interest at a contractual (stated) rate on the
maturity amount (face value).

Interest payments usually made semiannually.

Generally issued when the amount of capital needed is
too large for one lender to supply.
SO 1 Explain why bonds are issued.
Bond Basics
Issuer of
Bonds
Illustration 15-3
Maturity
Date
Contractual
Interest
Rate
15-9
Face or
Par Value
SO 1 Explain why bonds are issued.
Bond Basics
Determining the Market Value of Bonds
Market value is a function of the three factors that determine
present value:
1. dollar amounts to be received,
2. length of time until the amounts are received, and
3. market rate of interest.
The features of a bond (callable, convertible, and so on) affect the
market rate of the bond.
15-10
SO 1 Explain why bonds are issued.
Accounting for Bond Issues
Corporation records bond transactions when it

issues (sells),

retires (buys back) bonds and

when bondholders convert bonds into common stock.
NOTE: If bondholders sell their bond investments to other investors,
the issuing firm receives no further money on the transaction, nor
does the issuing corporation journalize the transaction.
15-11
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issue at Par, Discount, or Premium?
Illustration 15-4
Bond
Contractual
Interest Rate
of 10%
15-12
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Question
The rate of interest investors demand for loaning funds to
a corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
15-13
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Question
Karson Inc. issues 10-year bonds with a maturity value of
$200,000. If the bonds are issued at a premium, this indicates
that:
a. the contractual interest rate exceeds the market interest
rate.
b. the market interest rate exceeds the contractual interest
rate.
c. the contractual interest rate and the market interest rate
are the same.
d. no relationship exists between the two rates.
15-14
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issuing Bonds at Face Value
Illustration: On January 1, 2012, Candlestick Corporation
issues $100,000, five-year, 10% bonds at 100 (100% of face
value). The entry to record the sale is:
Jan. 1
Cash
Bonds payable
15-15
100,000
100,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Illustration: On January 1, 2012, Candlestick Corporation
issues $100,000, five-year, 10% bonds at 100 (100% of face
value). Assume that interest is payable semiannually on
January 1 and July 1. Prepare the entry to record the payment
of interest on July 1, 2012, assume no previous accrual.
July 1
Interest expense
Cash
15-16
5,000
5,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face Value
Illustration: On January 1, 2012, Candlestick Corporation
issues $100,000, five-year, 10% bonds at 100 (100% of face
value). Assume that interest is payable semiannually on
January 1 and July 1. Prepare the entry to record the accrual
of interest on December 31, 2012, assume no previous
accrual.
Dec. 31
Interest expense
Interest payable
15-17
5,000
5,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issuing Bonds at a Discount
Illustration: On January 1, 2012, Candlestick, Inc. sells
$100,000, five-year, 10% bonds for $92,639 (92.639% of face
value). Interest is payable on July 1 and January 1. The entry
to record the issuance is:
Jan. 1
Cash
Discount on bonds payable
Bond payable
15-18
92,639
7,361
100,000
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Statement Presentation
Illustration 15-5
Carrying value or
book value
Sale of bonds below face value causes the total cost of borrowing to
be more than the bond interest paid.
The reason: Borrower is required to pay the bond discount at the
maturity date. Thus, the bond discount is considered to be a
increase in the cost of borrowing.
15-19
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Total Cost of Borrowing
Illustration 15-6
Illustration 15-7
15-20
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Discount
Question
Discount on Bonds Payable:
a. has a credit balance.
b. is a contra account.
c. is added to bonds payable on the balance sheet.
d. increases over the term of the bonds.
15-21
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Issues
Issuing Bonds at a Premium
Illustration: On January 1, 2012, Candlestick, Inc. sells
$100,000, five-year, 10% bonds for $108,111 (108.111% of
face value). Interest is payable on July 1 and January 1. The
entry to record the issuance is:
Jan. 1
Cash
Bonds payable
Premium on bond payable
15-22
108,111
100,000
8,111
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Statement Presentation
Illustration 15-8
Sale of bonds above face value causes the total cost of borrowing
to be less than the bond interest paid.
The reason: The borrower is not required to pay the bond premium at
the maturity date of the bonds. Thus, the bond premium is
considered to be a reduction in the cost of borrowing.
15-23
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a Premium
Total Cost of Borrowing
Illustration 15-9
Illustration 15-10
15-24
SO 2 Prepare the entries for the issuance of bonds and interest expense.
Accounting for Bond Retirements
Redeeming Bonds at Maturity
Assuming that the company pays and records separately the
interest for the last interest period, Candlestick records the
redemption of its bonds at maturity as follows:
Bond payable
Cash
15-25
100,000
100,000
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Redeeming Bonds before Maturity
When bonds are retired before maturity, it is necessary to:
1. eliminate carrying value of bonds at redemption date;
2. record cash paid; and
3. recognize gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds less
unamortized bond discount or plus unamortized bond premium at the
redemption date.
15-26
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Question
When bonds are redeemed before maturity, the gain or
loss on redemption is the difference between the cash
paid and the:
a. carrying value of the bonds.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.
15-27
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Illustration: Assume Candlestick, Inc. has sold its bonds at a
premium. At the end of the eighth period, Candlestick retires
these bonds at 103 after paying the semiannual interest. The
carrying value of the bonds at the redemption date is $101,623.
Candlestick makes the following entry to record the redemption
at the end of the eighth interest period (January 1, 2016):
Bonds payable
Premium on bonds payable
1,623
Loss on bond redemption
1,377
Cash
15-28
100,000
103,000
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Converting Bonds into Common Stock
Until conversion, the bondholder receives interest on the
bond.
For the issuer, the bonds sell at a higher price and pay a
lower rate of interest than comparable debt securities without
the conversion option.
Upon conversion, the company transfers the carrying value of
the bonds to paid-in capital accounts. No gain or loss is
recognized.
15-29
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Illustration: On July 1 Saunders Associates converts
$100,000 bonds sold at face value into 2,000 shares of $10 par
value common stock. Both the bonds and the common stock
have a market value of $130,000. Saunders makes the
following entry to record the conversion:
Bonds payable
15-30
100,000
Common stock (2,000 x $10)
20,000
Paid-in capital in excess of par value
80,000
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Bond Retirements
Question
When bonds are converted into common stock:
a. a gain or loss is recognized.
b. the carrying value of the bonds is transferred to
paid-in capital accounts.
c. the market price of the stock is considered in the
entry.
d. the market price of the bonds is transferred to
paid-in capital.
15-31
SO 3 Describe the entries when bonds are redeemed or converted.
Accounting for Other Long-Term Liabilities
Long-Term Notes Payable
May be secured by a mortgage that pledges title to specific
assets as security for a loan.
Typically, terms require borrower to make installment payments
over the term of the loan. Each payment consists of

interest on the unpaid balance of the loan and

a reduction of loan principal.
Companies initially record mortgage notes payable at face value.
15-32
SO 4 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20year mortgage note on December 31, 2012. The terms provide for
semiannual installment payments of $33,231 (not including real
estate taxes and insurance). The installment payment schedule for
the first two years is as follows.
Illustration 15-11
15-33
SO 4 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Illustration: Porter Technology Inc. issues a $500,000, 12%, 20year mortgage note on December 31, 2012. The terms provide for
semiannual installment payments of $33,231 (not including real
estate taxes and insurance). The installment payment schedule for
the first two years is as follows.
Dec. 31
Cash
500,000
Mortgage payable
Jun. 30
Interest expense
30,000
Mortgage payable
3,231
Cash
15-34
500,000
33,231
SO 4 Describe the accounting for long-term notes payable.
Accounting for Other Long-Term Liabilities
Question
Each payment on a mortgage note payable consists of:
a. interest on the original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and
reduction of loan principal.
d. interest on the unpaid balance of the loan and
reduction of loan principal.
15-35
SO 4 Describe the accounting for long-term notes payable.
15-36
Accounting for Other Long-Term Liabilities
Lease Liabilities
A lease is a contractual arrangement between a lessor (owner
of the property) and a lessee (renter of the property).
Illustration 15-12
15-37
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Liabilities
The issue of how to report leases is the case of substance
versus form. Although technically legal title may not pass, the
benefits from the use of the property do.
Operating Lease
Journal Entry:
Rent expense
Cash
Capital Lease
xxx
xxx
Journal Entry:
Leased equipment
Lease liability
xxx
xxx
A lease that transfers substantially all of the benefits and
risks of property ownership should be capitalized (only
noncancellable leases may be capitalized).
15-38
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Liabilities
To capitalize a lease, one or more of four criteria must be
met:
15-39

Transfers ownership to the lessee.

Contains a bargain purchase option.

Lease term is equal to or greater than 75 percent of the
estimated economic life of the leased property.

The present value of the minimum lease payments
(excluding executory costs) equals or exceeds 90
percent of the fair value of the leased property.
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Liabilities
Illustration: Gonzalez Company decides to lease new
equipment. The lease period is four years; the economic life of
the leased equipment is estimated to be five years. The
present value of the lease payments is $190,000, which is
equal to the fair market value of the equipment. There is no
transfer of ownership during the lease term, nor is there any
bargain purchase option.
Instructions:
15-40
(a)
What type of lease is this? Explain.
(b)
Prepare the journal entry to record the lease.
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Liabilities
Illustration: (a) What type of lease is this? Explain.
Capitalization Criteria:
1. Transfer of ownership
NO
2. Bargain purchase option
NO
3. Lease term => 75% of
economic life of leased
property
4. Present value of minimum
lease payments => 90% of
FMV of property
15-41
Capital Lease?
Lease term
Economic life
YES
4 yrs.
5 yrs.
80%
YES - PV and FMV
are the same.
SO 5 Contrast the accounting for operating and capital leases.
Accounting for Other Long-Term Liabilities
Illustration: (b) Prepare the journal entry to record the lease.
Leased asset - equipment
Lease liability
190,000
190,000
The portion of the lease liability expected to be paid in the next
year is a current liability.
The remainder is classified as a long-term liability.
15-42
SO 5 Contrast the accounting for operating and capital leases.
Statement Presentation and Analysis
Presentation
Illustration 15-13
15-43
SO 6 Identify the methods for the presentation
and analysis of long-term liabilities.
Statement Presentation and Analysis
Analysis
Two ratios that provide information about debt-paying
ability and long-run solvency are:
15-44

Debt to Total Assets Ratio

Times Interest Earned Ratio
SO 6 Identify the methods for the presentation
and analysis of long-term liabilities.
Statement Presentation and Analysis
Analysis
Illustration: Kellogg had total liabilities of $8,925 million, total
assets of $11,200 million, interest expense of $295 million, income
taxes of $476 million, and net income of $1,208 million.
The higher the percentage of debt to total assets, the greater the
risk that the company may be unable to meet its maturing obligations.
15-45
SO 6
Statement Presentation and Analysis
Analysis
Illustration: Kellogg had total liabilities of $8,925 million, total
assets of $11,200 million, interest expense of $295 million, income
taxes of $476 million, and net income of $1,208 million.
Times interest earned indicates the company’s ability to meet
interest payments as they come due.
15-46
SO 6
15-47
Present Value
Concepts Related
to Bond Pricing
APPENDIX15A
Present Value of Face Value
Illustration: Assume that you are willing to invest a sum of money
that will yield $1,000 at the end of one year, and you can earn 10%
on your money. What is the $1,000 worth today?
To compute the answer,
1. divide the future amount by 1 plus the interest rate
($1,000/1.10 = $909.09 OR
2. use a Present Value of 1 table. ($1,000 X .90909) = $909.09
(10% per period, one period from now).
15-48
SO 7 Compute the market price of a bond.
Present Value of Face Value
To compute the answer,
1. divide the future amount by 1 plus the interest rate
($1,000/1.10 = $909.09.
Illustration 15A-1
15-49
SO 7 Compute the market price of a bond.
Present Value of Face Value
To compute the answer,
2. use a Present Value of 1 table. ($1,000 X .90909) =
$909.09 (10% per period, one period from now).
15-50
SO 7 Compute the market price of a bond.
Present Value of Face Value
The future amount ($1,000), the interest rate (10%), and the
number of periods (1) are known
Illustration 15A-2
15-51
SO 7 Compute the market price of a bond.
Present Value of Face Value
If you are to receive the single future amount of $1,000 in
two years, discounted at 10%, its present value is $826.45
[($1,000 / 1.10) / 1.10].
Illustration 15A-3
15-52
SO 7 Compute the market price of a bond.
Present Value of Face Value
To compute the answer using a Present Value of 1 table.
($1,000 X .82645) = $826.45 (10% per period, two periods
from now).
15-53
SO 7 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
In addition to receiving the face value of a bond at maturity,
an investor also receives periodic interest payments
(annuities) over the life of the bonds.
To compute the present value of an annuity, we need to
know:
1) interest rate,
2) number of interest periods, and
3) amount of the periodic receipts or payments.
15-54
SO 7 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
Illustration 15A-5
15-55
SO 7 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
Illustration 15A-6
15-56
SO 7 Compute the market price of a bond.
Present Value of Interest Payments (Annuities)
Assume that you will receive $1,000 cash annually for three
years and the interest rate is 10%.
$1,000 annual payment x 2.48685 = $2,486.85
15-57
SO 7 Compute the market price of a bond.
Computing the Present Value of a Bond
Selling price of a bond is equal to the sum of:

Present value of the face value of the bond discounted
at the investor’s required rate of return
PLUS

15-58
Present value of the periodic interest payments
discounted at the investor’s required rate of return
SO 7 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 15A-8
15-59
SO 7 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 15A-9
15-60
SO 7 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 15A-10
15-61
SO 7 Compute the market price of a bond.
Computing the Present Value of a Bond
Assume a bond issue of 10%, five-year bonds with a face value
of $100,000 with interest payable semiannually on January 1
and July 1.
Illustration 15A-11
15-62
SO 7 Compute the market price of a bond.
APPENDIX15C
Straight-Line
Amortization
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2012, for $92,639 (discount of $7,361).
Interest is payable on July 1 and January 1.
Illustration 15C-2
15-63
SO 8 Apply the effective-interest method of amortizing
bond discount and bond premium.
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2012, for $92,639 (discount of $7,361).
Interest is payable on July 1 and January 1. The bond discount
amortization for each interest period is $736 ($7,361/10).
Journal entry on July 1, 2012, to record the interest payment and
amortization of discount is as follows:
July 1
Interest Expense
Discount on Bonds Payable
Cash
15-64
5,736
736
5,000
SO 8 Apply the effective-interest method of amortizing
bond discount and bond premium.
Additional Material for Practice on Bonds
Straight-Line Amortization of Bond Discount
$6,624 ÷ 4 = $1,656
Interest Expense (+E, -OE)
Discount on Bonds Payable (-xL, +L)
Cash (-A)
Debit
7,656
Credit
1,656
6,000
This method results in equal amounts of interest expense each
period. This table shows the straight-line amortization of a
15-65
01.01.2007
Ex: (..previous slide)
Bonds priced at 93,3760
(%93,3760 of face value) to
reflect the market interest rate.
12/31/2007
Bonds have a face value of 100
000 USD and stated interest rate
of %6 with annual payments.
Do the entries for the issue date
(1/1/2007), interest payments (4
years) , maturity date
(12/31/2010)..
--Straight-Line Method of
Amortization--
12/31/2008
12/31/2009
12/31/2010
15-66
Cash
Discount on B/P
Bonds payable
Interest Expense
Discount on B/P
(6624/4 periods=1656)
Cash
Interest Expense
Discount on B/P
(6624/4 periods=1656)
Cash
Interest Expense
Discount on B/P
(6624/4 periods=1656)
Cash
Interest Expense
Discount on B/P
(6624/4 periods=1656)
Cash
Bonds payable
cash
93.376
6.624
100.000
7.656
1.656
6.000
7.656
1.656
6.000
7.656
1.656
6.000
7.656
1.656
6.000
100.000
100.000
Additional Material for Practice on Bonds
(use of straight line amortization method)
Accounting for Bonds Issued at Maturity Value
(exercise)
GENERAL JOURNAL
DATE
Maturity
date
DESCRIPTION
Bond payable
Cash
DEBIT
CREDIT
100,000
100,000
To record payment of bonds at
maturity
When the bonds mature, Bonds payable is debited, which will zero
out the account. Cash is credited to record payment to the
bondholders.
15-67
Accounting for Bonds Issued at a Discount
Contra account to
Bonds payable
GENERAL JOURNAL
DATE
DESCRIPTION
Cash
Issue
date
Discount on bonds payable
Bonds payable
DEBIT
CREDIT
98,000
2,000
100,000
To record issuance of $100,000, 10-year, 8% bonds sold at
98 (98% of the maturiy value)
Market conditions may force a company to accept a discount price for its bonds.
Suppose a company issues $100,000 of its 8%, 10-year bonds at 98. The
company receives $98,000 ($100,000 0.98) at issuance and makes this journal
entry. The difference of $2,000 is the discount, and has its own account. Discount
on bonds payable is a contra account to Bonds payable.
15-68
Carrying Value of Bonds Payable
Long-term liabilities
Bonds payable
$100,000
Less: Discount on bonds payable
( $2,000) $98,000
Carrying
value
15-69
Accounting for Bonds Issued at a
Discount
(interest payments)
GENERAL JOURNAL
DATE
Int. pmt
date
DESCRIPTION
Interest expense
Discount on bonds payable
Cash
DEBIT
CREDIT
4,100
100
4,000
$100,000 x 8% x 6/12
$2,000/10
x 6/12
Amortize “Discount on B/P” account with “straight line amortization “method
The company borrowed $98,000, but must pay $100,000 when the bonds mature 10 years later. the $2,000 discount is
additional interest expense. The discount becomes interest expense through a process called amortization, the gradual
reduction of an item over time. We can amortize a bond discount by dividing it into equal amounts for each interest
period. This method is called straight-line amortization and it works very much like the straight-line depreciation
method. The journal entry above shows this process
15-70
Accounting for Bonds Issued at a Premium
Companion account
to Bonds payable
GENERAL JOURNAL
DATE
DESCRIPTION
Issue Cash
date
Premium on bonds payable
DEBIT
CREDIT
104,000
Bonds payable
4,000
100,000
To record issuance of $100,000, 10-year, 8% bonds priced at 104
(104% of maturity value)
To illustrate a bond premium, let’s change the example. Assume the bonds are priced at 104 (104% of
maturity value). In that case, the company receives $104,000 cash upon issuance. Bonds payable and
the Premium account each carry a credit balance. The Premium is a companion account to Bonds
payable.
15-71
Carrying Value of Bonds Payable
Long-term liabilities
Bonds payable
Plus: Premium on bonds payable
$100,000
$4,000 $104,000
Carrying
value
15-72
Accounting for Bonds Issued at a Premium
(interest payment)
GENERAL JOURNAL
DATE
Int.
pmt
date
DESCRIPTION
Interest expense
Premium on bonds payable
$4,000/10
x 6/12
DEBIT
CREDIT
3,800
200
Cash
4,000
$100,000 x 8% x 6/12
The company borrowed $104,000, but only has to pay $100,000 when the bonds mature 10 years later. What happens to the
$4,000 Premium account? The Premium reduces Interest expense through amortization.
This journal entry shows this process-straight line amortization. The Premium is debited (reduced) by $200. This is
computed by dividing the $4,000 premium by the number of years of the bond’s life, 10, multiplied by 6/12 of a year. The
credit to Cash is the same as before - $100,000 x 8% x 6/12. Interest expense is debited for the interest payment minus the
premium amortization.
15-73
Carrying Value
Bonds payable
$100,000
Premium
$200
$4,000
$3,800
Carrying value after first
interest payment =
$103,800
15-74
Adjusting Entries for Bonds Payable

If Interest payments do not occur at the year-end for the bond, then
interest must be accrued.
GENERAL JOURNAL
DATE
12
DESCRIPTION
31 Interest expense
DEBIT
CREDIT
2,050
Discount on bonds payable
50
Interest payable
2000
(100,000 x 8% x 3/12)
$2,000/10 x 3/12
The accrual entry should also amortize any bond discount or premium.
Suppose a company issued $100,000 of 8%, 10-year bonds at a $2,000 discount on October 1, 2010. The
interest payments occur on March 31 and September 30 each year. On December 31, the company accrues
interest and amortizes bond discount for three months. Interest payable is credited for three months (October,
November, and December). Discount on bonds payable must also be amortized for these three months.
The next semiannual interest payment occurs on March 31, 2011,
- the company makes the journal entry on the next slide.
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Adjusting Entries for Bonds Payable

The following interest payment entry will take into account the
adjusting entry previously made
GENERAL JOURNAL
DATE
3
DESCRIPTION
31 Interest payable
Interest expense
Discount on bonds payable
Cash
x 3/12
DEBIT $2,000/10
CREDIT
2,000
2,050
50
4,000
(100,000 x 8% x 6/12)
The next semi-annual interest payment occurs on March 31, 2011. Interest payable is debited to
zero out the adjusting entry. Cash is credited for the full semi-annual interest payment. The
discount is amortized for three months. Interest expense is a “plug” number – the number that
makes the entry balance.
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