Issuing bonds to investors provides a corporation with the ability to finance the company’s operations. From the company’s perspective, a bond exists as a long-term obligation. A company must pay interest to the bondholder at the rate stated on the bond, which usually occurs at a semiannual rate, as explained by the Cliffs Notes website. Furthermore, the company must pay the bondholder the face value of the bond at the stated date of maturity. One of the biggest advantages of issuing bonds is that it does not dilute the ownership interest of the company’s stockholders in the same manner as issuing common stock, according to the Accounting Coach website.
Multiply the face value of the bond by the stated interest rate on the bond. For example, if the face value of a bond is $1,000 and the interest rate is 8 percent, the interest on the bond is $80. The $80 interest expense represents the amount of interest accumulated on the bond in one year.
Divide the yearly interest expense by 2. Most bonds involve semiannual interest payments to a bondholder as opposed to yearly interest payments. For example, if interest expense for the year is $80, divide $80 by 2, which results in a semiannual interest expense of $40. In this scenario, a company must make $40 semiannual interest payments to the bondholder until the loan gets paid off at the date of maturity.
Record the interest expense from the bond in the general journal. Indicate the date when the interest gets paid to the bondholder. Debit the interest expense account for the interest recognized in the period. Using this example, the company must debit interest expense for $40 every 6 months to indicate the accumulating interest on the bond.
Credit the cash account for the same amount as the interest expense debit. For example, if a company enters a $40 interest expense debit the credit to cash must be for $40. This indicates that the company paid cash to the bondholder to cover the interest payment.