Other than Zero coupon bonds and savings bonds I am discussing about the BONDS ISSUED BETWEEN INTEREST DATES:
The bond indenture specifies all the important details of the bond, including the interest dates. Usually the bond is sold on an interest date. For example, if the interest dates are January 1 and July 1, the bond will be sold on one of these dates. Occasionally it happens that the sale is delayed until a later date. Regardless of when the sale occurs, interest still accrues from the interest date. If the interest dates are January 1 and July 1 and the bond is sold March 1, interest must still be paid from January 1 (remember: the indenture is a legal contract and all its provisions must be followed).
To avoid having to pay interest for the time period before the issuance, the corporation will raise the price of the bond by the amount of the accrued interest. This is not a premium; it is simply a recovery of the “wasted” interest. EXAMPLE of BONDS ISSUED BETWEEN INTEREST DATES A $100,000, 5-year, 8% bond whose interest is payable December 31 and July 1 is issued at par plus accrued interest on April 1. The accrued interest for December 31 to April 1 is $2,000 ($100,000 × 8% × 3/12). The accounting journal entry is:
Apr. 1
Cash 102,000
Bonds Payable 100,000
Interest Expense 2,000
July 1
Interest Expense 4,000
Cash 4,000
Dec. 31
Interest Expense 4,000
Cash 4,000
The interest expense for the year will only be $6,000 ($4,000 + $4,000 − $2,000) since $2,000 was recovered as a result of raising the selling price. If a premium or discount is involved, it should be amortized from the date of the sale, not the originally intended issue date. BONDS ISSUED BETWEEN INTEREST DATES is fully discussed in the text book. I will discuss Zero coupon bonds and savings bonds in later articles.
Bond is a debt security in which the issuer borrows the debt from the the holders , and bases on the terms of the bond, he is obliged to pay them interest and/or to repay the principal at the maturity date.
