Accounting for the acquisition of bonds

Accounting for bonds by the investor is similar to that by the issuer, except that the investor records an asset, Investment in Bonds, rather than a liability, Bonds Payable. The Investment in Bonds account can be classified as either a current asset or a long-term investment, depending on the marketability of the bonds and management’s intention as to when the bonds will be converted into cash. Thus, bonds can be purchased in order to invest idle cash on a short-term basis, to make a long-term investment in another company, or to accumulate funds for future expansion plans.

Accounting for the acquisition of bonds

The acquisition price of bonds includes their purchase price, brokerage commission, and any other costs related to the purchase. Bonds may be purchased at their face value, at a discount or premium, and at or between interest dates. In practice, the debit to the Investment in Bonds account is made at cost, including all acquisition costs but excluding the accrued interest element.

A separate account is not maintained for the premium or discount. This practice varies from the accounting procedures used by the issuer and the recommendation found in official pronouncements. However, the investor seldom purchases an entire bond issue, and the amount of the discount or premium is not material.

Also Check:  Bonds issued at a premium

If bonds are purchased between interest dates, the investor must pay the issuer or the previous bondholder for any interest accrued since the last interest date, because the purchaser will collect the full six months’ interest on the next interest date.

Illustration

To illustrate these procedures, assume that the Cinzano Corporation purchased 12 $1,000, 10%, 5-year bonds on March 1, 2020. The bonds are dated January 1, 2020. The total face value of the bonds was $ 12,000. The bonds pay interest semiannually on January 2 and July 1 and were purchased at a price of 98. The below entry is made to record this investment:

Accounting-for-acquisition-of-bonds-journal-entry

The Investment in Bonds account is recorded at $11,760, net of the discount of $240 (12,000 — $11,760). The $11,760 also represents the carrying value of the bonds at their purchase date. Interest Receivable is debited for the two months’ interest that has accrued since the last payment date on January 2. The receivable is debited because the investor will receive all six months’ interest on July 1, 2020.

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