Discount On Bonds Payable
Suppose a company requires funding for a proposed project.
![dp2](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp2.jpg)
One way to get the money is to borrow it via a bond issue.
![dp3](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp3.jpg)
This means they will sell their bonds to investors
![dp 3.1](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp-3.1.jpg)
When issuing their bond, the company will consider the current level of interest rates.
![dp4](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp4.jpg)
They will set their bond’s coupon rate at or around this level.
![dp5](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp5.jpg)
This is known as the stated rate.
![dp6](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp6.jpg)
When selling the bonds to investors, the company hopes to sell them for par value.
![dp7](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp7.jpg)
This way, they receive the full face value of each bond from investors.
![dp8](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp8.jpg)
With bond issuance, though, there is quite a bit to prepare beforehand—getting approval, printing of bond certificates, arranging sellers etc.
![dp9](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp9.jpg)
Often, administrative problems can delay the bond issue.
![dp10](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp10.jpg)
If interest rates are volatile during this time, they can move quite a bit during such delays.
![dp11](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp11.jpg)
Sometimes, interest rates will rise ahead of a bond issue.
![dp12](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp12.jpg)
Should this happen, investors will lose interest in the issue.
![dp13](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp13.jpg)
They can get a better rate elsewhere.
![dp14](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp14.jpg)
In this event, the company will need to discount their bonds.
![dp15](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp15.jpg)
Discounting the bond effectively increases the interest rate.
![dp16](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp16.jpg)
This will bring the bond into line with competing bonds.
![dp17](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp17.jpg)
With discounted bonds, the bond holder still only receives the stated interest rate each year.
![dp18](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp18.jpg)
However, they offset this with the bond price.
![dp19](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp19.jpg)
With a discounted bond, they don’t pay full price.
![dp20](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp20.jpg)
Instead, they buy the bond at a discount.
![dp21](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp21.jpg)
Later, when they redeem the bond, they will receive full face value.
![dp22](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp22.jpg)
In other words, they will get back more than they paid.
![dp23](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp23.jpg)
This tops up what they receive in interest payments.
![dp24](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp24.jpg)
Adding the interest payments and the discount together will improve the bond’s yield.
![dp25](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp25.jpg)
Accounting for Discounted Bonds Payable
You begin by recording the bond as if it wasn’t discounted at all.
![dp26](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp26.jpg)
To do this, you credit the bonds payable account with the bond’s full face value.
![dp27](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp27.jpg)
This shows the total value coming from the bond.
![dp28](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp28.jpg)
The bond’s total value is made up of two parts.
![dp29](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp29.jpg)
One part is the money received from the investor.
![dp30](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp30.jpg)
This money is deposited in the bank.
![dp31](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp31.jpg)
To record the deposit, you debit the cash account.,
![dp32](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp32.jpg)
This shows the money went to the bank.
![dp33](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp33.jpg)
The other part of the bond’s value is the discount itself.
![dp34](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp34.jpg)
You assign this portion of the bond’s value to the discount on bonds payable account.
![dp35](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp35.jpg)
The discount on bonds payable account is a contra liability account, attached to the bonds payable account.
![dp36.1](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp36.1.jpg)
It’s a valuation account that decreases the value of the bonds payable account.
![dp37.1](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp37.1.jpg)
To record the discount, debit the discount on bonds payable account.
![dp38](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp38.jpg)
This shows you have assigned the discount’s value to that account.
![dp39](https://seeaccountingnow.online/wp-content/uploads/2021/10/dp39.jpg)
© R.J.(Bob) Hickman 2020
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