What are bonds payable?
Bonds payable are generated when a company issues bonds to generate cash. As a bond issuer, the company is a borrower. As such, the act of issuing the bond creates a liability. Thus, bonds payable appear on the liability side of the balance sheet. Generally, bonds payable fall in the long-term class of liabilities.
Bonds are issued at a premium, at a discount, or at par. This depends on the difference between its coupon rate and the market yield on issuance. When a bond is issued, the issuer records the face value of the bond as the bonds payable. They receive cash for the fair value of the bond, and the positive (negative) difference (if any) is recorded as a premium (discount) on bonds payable.
Carrying Value of Bonds
The carrying value of a bond is not equal to the bond payable, unless the bond was issued at par.
The carrying value is found through the following formula:
Carrying Value = Bonds Payable + Unamortized Premium/Discount
When a bond is issued at a premium, the carrying value is higher than the face value of the bond (bond payable). When a bond is issued at a discount, the carrying value is less than the face value of the bond. When a bond is issued at par, the carrying value is equal the face value of the bond.
On issuance, the carrying value is equal to the fair value of the bond. This is also the same as the price of the bond, and the amount of cash that the issuer receives. On maturity, the carrying value is equal to the face value of the bond. Both of these statements are true, regardless of issuance at premium, discount, or at par.
Amortizing Bonds Payable
If a bond is issued at a premium or at a discount, the bond will be amortized over the years through to its maturity. On issuance, a premium bond will create a “premium on bonds payable” balance. At every coupon payment, interest expense will be incurred on the bond. The actual interest paid out (also known as the coupon) will be higher than the expense. The difference is the amortization that reduces the premium on bonds payable account. This is also true for a discount bond, however, the effects are reversed.
An analyst or accountant can also create an amortization schedule for the bonds payable. This schedule will lay out the premium or discount, and show changes to it every period coupon payments are due. At the end of the schedule (in the last period), the premium or discount should equal zero. At that point, the “amortized” value of the bond payable should equal the bonds face value.
Learn more about the Balance Sheet
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