Issuing Bonds
Bonds are essentially a form of financing for a company, but instead of borrowing form a bank the company is borrowing from investors. In exchange, the company agrees to pay the bondholders interest at predetermined intervals, for a set amount of time.
Bonds differ from notes payable because a note payable represents an amount payable to only one lender, while multiple bonds are issued to different lenders at the same time. Also, the bondholders may sell their bonds to other investors any time prior to the bonds maturity.
Bond prices
The market price of a bond is expressed as a percentage of nominal value. For example, a bond issued at par is selling for 100% of its face value. Bonds can sell for less than their face value, for example a bond price of 75 means that the bond is selling for 75% of its par (face value).
The amount of risk associated with the company issuing the bond determines the price of the bond. The more risk assessed to a company the higher the interest rate the issuer must pay to buyers. If a bond has a coupon interest rate that is higher than the market interest rate it is considered a premium.
The premium (higher interest rate) is to offset the assumed higher than average risk associated with investing in the company.
Bonds are considered issued at a discount when the coupon interest rate is below the market interest rate.That means a company selling bonds at a discount rate receive less than the face value of the bond in the sale.
When bonds are issued, they are classified as long-term liabilities. On issuance, the journal entry to record the bond is a debit to cash and a credit to bonds payable.
Other journal entries associated with bonds is the accounting for interest each period that interest is payable. The journal entry to record that is a debit interest expense and a credit to cash.