How to Calculate Carrying Value of a Bond

Make the initial entry at the date of bond sale. For both bond premiums and discounts, the company will have to make an initial journal entry when the bonds are sold that records the cash received and the discount or premium given. In both cases, bonds payable will be credited for the total face value of the bonds.

• Using the previous example, with the company issuing $200,000 bond would record a $200,000 credit to Bonds Payable.
• If the company sells the bonds with a $2,000 discount, the company would debit the cash account for the cash received, $198,000 ($200,000 - $2,000) and debit Discount on Bonds payable for the amount of the discount, $2,000.^[7]
• Similarly, if the company sells the bonds with a $2,000 premium, the company would debit the cash account for cash received, which would total $202,000 ($200,000 + $2,000). They would also credit Premium on Bonds Payable for the amount of the premium, $2,000.^[8]

Calculate how much of the premium/discount will be amortized. When the next entries are made, the company will have to determine how much of the premium or discount to amortized. This amount will reduce the balance of either the discount or premium on bonds payable. If they are using straight-line depreciation, this amount will be equal for every reported period. For simplicity, we still stick to using this method in the example.

• Imagine that for our example $200,000 bond issue, the bond makes a coupon payment twice per year, or every six months. This means that we will make two entries per year that record interest expense. Additional entries must be made at the same time for the proper amount of amortization of premiums or discounts.^[9]
• Because it is a 5-year bond payable semi-annual payment, we will amortize one-tenth of the premium or discount in each period (5 years x twice per year). For our $2,000 premium or discount, this means recording $200 amortization each time.

Calculate interest expense. In order to properly report amortization, we will also need the know the amount of interest expense paid to bondholders over the same period. This is the amount of the coupon payment, based on a percentage of the par value. It is made in annual or semiannual payments to bondholders. Calculate annual interest expense by multiplying the coupon rate, or interest rate, by the par value of the bond. Divide this number by two to get the semiannual interest expense.

• For the example $200,000 bond, the interest expense would be found by multiplying the coupon rate, 10%, by the par value, $200,000. This gives $20,000. Therefore, the semi-annual interest expense recorded would be half of that, or $10,000.

Record discount/premium amortizations on annual statements. For each year, the company must record any interest expense paid incurred from the sale and maintenance of bonds. This includes both the coupon payments made to bondholders plus or minus the premium or discount amortization. For semiannual payments, the company would record both interest payments made within the year separately, along with their respective amortizations.

• This is recorded with a debit to interest expense for the total interest expense, which is either the semiannual interest payment plus the amortization on the discount or minus the amortization on the premium.
• For a discount, there are also a credit to cash account for the amount of interest expense and a credit to discount on bonds payable for the amount of the amortization. These are entered equally for both semiannual payments.
• For a premium, there are also a debit to premium on bonds payable for the amount of the premium amortization and a credit to the cash account for the amount of the interest payment,
• For example, using the aforementioned $200,000 bond sale and a discount, we would recognize the $10,000 semiannual interest payment plus the $200 discount amortization as a debit to interest expense for a total of $10,200. We would also credit discount on bonds payable for $200 and credit the cash account for $10,000.

Determine the terms of the bond in question. Know whether the bond sold at par, at a premium, or at a discount. Determine the time elapsed since the bond's issuance. To calculate the carrying value of a bond, you will need to know how much of the premium or discount has been amortized, which will depend on the time elapsed since the issue date.^[10]

Calculate the amortized portion of the discount or premium. Most premiums or discounts will be amortized on a straight-line basis, meaning the same amount is amortized each reporting period. For example, suppose a 10-year bond was issued two years ago. Two years of amortization have been recorded, and eight years of amortization remain. You need to know the remaining amount of unamortized discount or premium to calculate the carrying value.^[11]

• For example, suppose a company issued a 10 year bond with an $80 premium two years ago. Each year, $8 of amortization is recorded ($80 / 10 years = $8 per year). If two years have passed, then $16 of amortization has been recorded ($8 x 2 years = $16) and $64 is unamortized ($8 x 8 years = $64).

Calculate the carrying value of a bond sold at premium. Suppose a company sold $1,000 10%, 10 year bonds for $1,080 and 2 years have passed since the issue date. Calculate the premium by subtracting the face value from the sale price with the equation $1,000 - $1,080 = $80. The $80 premium will be amortized over the term of the bond at $8 per period. Since two years have passed, two amortization entries have been recorded. Eight amortization entries remain. Calculate the remaining amortization with the equation $8 x 8 = $64. The carrying value equals the face value of the bond plus the remaining premium to be amortized. Use the equation $1,000 + $64 = $1,064.

Calculate the carrying value of a bond sold at a discount using the same method. Subtract the unamortized discount from the face value. For example, suppose a company sold a $1,000, 10%, 10 year bond for $920, or an $80 discount and two years have passed since the bond issuance. The annual amortization of the discount is $8. Two amortization entries have been recorded. Eight remain, for a value of $8 x 8 = $64. The carrying value of the bond is $1,000 - $64 = $936.

Know the difference between straight-line amortization and the effective-interest method. Straight-line amortization records the same amount of interest expense in each period until the bond matures. The effective-interest method records interest expense based on the carrying value of the bond and the amount of interest paid. Both methods record the same amount of interest over the term of the bond. However, the difference is in how much is recorded each period and how it is calculated.^[12]

• In the United States, the straight-line amortization method is permitted under SEC-approved rules known as Generally Accepted Accounting Principles (GAAP). Elsewhere the effective interest method may be required in accordance with International Financial Reporting Standards (IFRS).

Understand straight-line amortization of bond discounts. The straight-line method of amortization records the same amount of interest expense in each interest period. For each period until the bond matures, the balance in discount and bonds payable will decrease by the same amount until it has a zero balance. Using this method, by the time the bond matures, the carrying value will be equal to the face value. ^[13]

• For example, suppose a company sold $200,000, 5-year, 10% bonds for $198,000. The $2,000 bond discount ($200,000 - $198,000) amortization is $400 ($2,000/5) for each of the five amortization periods.

Understand straight-line amortization of bond premiums. This is similar to straight-line amortization of bond discounts. Over the term of the bond, the balance in premium on bonds payable decreases by the same amount each period. By the time the bond matures, the balance in premium in bonds payable is zero, and the carrying value equals the face value of the bond. ^[14]

• For example, suppose a company sold $200,000 bond for $202,000. This results in a bond premium of $2,000 ($200,000 - $202,000). The premium amortization for each interest period is $400 ($2,000/5).