In order to raise funds some companies issue bonds to investors. They can issue it at par value meaning it is the actual or face value of the bond. They can also issue it at discount to make it more attractive to investors or issue it at a premium, raising the face value of the bond. Accrued bond interest expense is recorded in the company’s balance sheet. Accrued interest is the amount of interest that has already been earned but has not been paid yet. The interest is accrued on a daily basis and companies use different methods to compute the bond interest.
Accrued bond interest expense is recorded as a credit and a debit in a company balance sheet, as follows.
- If a company has prepared a bond with a face value of 9% $100,000 at the start of the year but delayed its actual issuance for a month, it has already accrued an interest of $750. The bond is set to mature in five years. The computation is $100,000 times nine percent time one over twelve. Nine percent is the interest rate and one over twelve is one month over twelve months. At par value of $100,000 plus one month interest, the company will actually expect to receive $100, 750. When entering it in the accounting journal, the date to be entered is the date the bond has been issued. In this case it should be February. On the Cash row, enter the full amount which is $100,750. This is a debit amount or amount owed. In the Bonds Payable, the entry should be for the par value which is $100,000, which is the credit amount or income amount. The accrued interest amount of $750 is entered separately as Interest Payable which is also falls in the credit category. You will compute the rest of the accrued interest for the succeeding five months to complete the first six months wherein the accrued interest should be paid. The amount of accrued interest for the following five months should be $3,750 as the total accrued interest due for the first half of the year is $4,500. Let us assume that this was done in 2009.
- Since the actual issuance was in February 2009, there will only 11 months of interest expense for that year. For an annual financial statement, the company ledger entries will be for June 2009 and December 2009. Interest expense for June 2009 will be $3,750 and in December 2009, the interest expense will be $4,500 making the total $8,250 for eleven months. The $750 interest that was accrued for January 2009 will be entered as Interest Payable. These entries are on the debit column. On the credit column, the Cash entry for June 2009 will still be $4,500 ($750 + $3,750), while the Cash entry for December 2009 will be $4,500 to make the credit and debit entries balance.
- For the succeeding years, from 2010 to 2013, the balance sheet will show that the accrued interest expense, payable during in June and December will have the same accrued interest expense of $4,500 for debit and Cash entry of $4,500 for the months of June and December.
The same method of computation can be arrived at even if the bond is issued at a discount or at a premium. It is based on this formula: Amount of Percent Interest x Value of Bond x 1/12 to get the accrued interest expense per month.