Bonds Payable: Recognition, Valuation, and Amortization Explained

Bonds payable represent long-term debt issued by a company to investors in exchange for cash. Unlike short-term loans or credit lines, bonds are typically issued in capital markets, allowing issuers to raise substantial funds for expansion, refinancing, or capital investments.

Accounting for bonds payable requires an understanding of initial recognition, measurement, interest expense calculation, and amortization of premiums or discounts — all of which impact both the balance sheet and the income statement over the life of the bond.

This article provides a clear guide to the accounting treatment of bonds payable, including issuance at par, premium, and discount, using real-world numerical examples.

1. What Are Bonds Payable?

Bonds payable are a form of long-term borrowing where the issuer agrees to pay:

✦ Fixed or floating interest payments (coupon)

✦ Repay principal at maturity (face value)

✦ Over a defined term, with payments typically made semiannually or annually

Common bond types include:

✦ Secured vs. Unsecured (debentures)

✦ Callable bonds

✦ Convertible bonds

✦ Zero-coupon bonds

Secured bonds are backed by assets or collateral, so if the issuer can't pay, the bondholders can claim those assets;

Unsecured bonds, also called debentures, aren't backed by anything—investors just trust the issuer to repay them;

Callable bonds let the issuer pay off the bond early, usually when interest rates go down so they can save money by refinancing;

Convertible bonds can be turned into shares of the company. Investors get the chance to benefit if the company's stock does well;

Zero-coupon bonds don’t pay interest along the way. Instead, you buy them for less than their face value and get the full amount back at maturity. The profit comes from that difference.

2. Accounting for Bonds at Issuance

When a bond is issued, the issuer receives cash and records a liability. The amount recorded depends on whether the bond is issued:

✦ At par (face value = issue price)

✦ At a discount (issue price < face value)

✦ At a premium (issue price > face value)

3. Issuance at Par Value

Scenario:

• Face value: $100,000

• Term: 5 years

• Coupon: 6% annually

• Market rate: 6%

• Issue price: $100,000

Journal Entry at Issuance:

Debit: Cash – $100,000

Credit: Bonds Payable – $100,000

Annual interest payment:

Debit: Interest Expense – $6,000

Credit: Cash – $6,000

4. Issuance at a Discount

Scenario:

• Face value: $100,000

• Coupon: 5% annually

• Market rate: 6%

• Issue price: $92,278 (present value of future cash flows)

The difference is a discount of $7,722.

Journal Entry at Issuance:

Debit: Cash – $92,278

Debit: Discount on Bonds Payable – $7,722

Credit: Bonds Payable – $100,000

The discount is amortized over the bond's life, increasing interest expense.

5. Issuance at a Premium

Scenario:

• Face value: $100,000

• Coupon: 7% annually

• Market rate: 6%

• Issue price: $107,722

The difference is a premium of $7,722.

Journal Entry at Issuance:

Debit: Cash – $107,722

Credit: Premium on Bonds Payable – $7,722

Credit: Bonds Payable – $100,000

The premium is amortized over the bond’s life, reducing interest expense.

6. Amortization of Discount or Premium

Two common methods are...

Straight-Line Method:

Equal amortization each period

Simpler, but less accurate when interest periods are uneven

Effective Interest Method (Required under IFRS):

Interest expense = Carrying amount × Market rate

Matches interest expense with actual borrowing cost

Adjusts carrying amount to face value over time

Discount Amortization Example (Effective Interest Method):

• Issue price: $92,278

• Face value: $100,000

• Term: 5 years

• Coupon: 5%

• Market rate: 6%

Year 1:

Carrying value = $92,278

Interest expense = $92,278 × 6% = $5,537

Cash interest = $100,000 × 5% = $5,000

Amortization = $5,537 – $5,000 = $537

Debit: Interest Expense – $5,537

Credit: Discount on Bonds Payable – $537

Credit: Cash – $5,000

7. Presentation in Financial Statements

Balance Sheet (Issuer):

✦ Bonds payable = face value

✦ Plus unamortized premium or

✦ Minus unamortized discount

✦ Classified as non-current liabilities, unless maturing within 12 months

Income Statement:

✦ Interest expense reflects market borrowing cost

✦ Premium reduces and discount increases interest expense over time

Cash Flow Statement:

✦ Interest paid = operating activities

✦ Proceeds from issuance = financing activities

✦ Principal repayment at maturity = financing outflow

8. IFRS vs. U.S. GAAP Differences

Area	U.S. GAAP	IFRS
Amortization methods	Straight-line or effective interest	Effective interest only
Presentation of premium/discount	Separate accounts allowed	Netted against bonds payable
Interest classification (cash flow)	Operating or financing (policy choice)	Operating or financing (choice)

9. Retirement and Early Redemption

If bonds are redeemed before maturity:

✦ Remove bonds payable and any premium/discount

✦ Record cash paid

✦ Recognize gain or loss on early retirement

Example – Early Redemption:

• Book value = $97,000

• Redemption price = $98,500

Debit: Bonds Payable – $100,000

Credit: Discount on Bonds Payable – $3,000

Credit: Cash – $98,500

Debit: Loss on Bond Redemption – $1,500