Noncurrent Liabilities – Bonds Payable and Notes Payable

Noncurrent liabilities represent financial obligations that are not due within the next 12 months. Among the most significant of these are bonds payable and notes payable, which companies issue to finance long-term operations, investments, or capital projects.

This article explains the recognition, measurement, and presentation of bonds and notes payable under U.S. GAAP (primarily ASC 470) and IFRS (IAS 1 and IFRS 9). It includes examples, journal entries, and key differences in classification and valuation.

1. What Are Bonds and Notes Payable?

✦ Bonds Payable – Formal debt instruments issued to multiple investors, typically traded in the market, with interest paid semiannually and principal repaid at maturity

✦ Notes Payable – Promissory notes issued to individual lenders or institutions, often private and with more flexible terms

Both are financial liabilities and are classified as noncurrent if not due within 12 months.

2. Initial Recognition and Measurement

Bonds and notes payable are initially recognized at fair value, usually the proceeds received from issuance. If issued at a premium or discount, the difference between face value and cash proceeds is recorded in a separate account.

To record issuance of a bond at par:Dr. Cash – $1,000,000 / Cr. Bonds Payable – $1,000,000.

To record issuance at a discount (e.g., issued at 98):Dr. Cash – $980,000 / Dr. Discount on Bonds Payable – $20,000 / Cr. Bonds Payable – $1,000,000.

To record issuance at a premium (e.g., issued at 102):Dr. Cash – $1,020,000 / Cr. Premium on Bonds Payable – $20,000 / Cr. Bonds Payable – $1,000,000.

Under IFRS, issuance costs are netted against the carrying amount of the liability.

3. Subsequent Measurement – Amortization and Interest

Premiums and discounts are amortized over the life of the bond using the effective interest method (required under IFRS; GAAP allows straight-line for simplicity if not materially different).

To record interest expense (discount amortization):Dr. Interest Expense – $52,000 / Cr. Discount on Bonds Payable – $2,000 / Cr. Cash – $50,000.

To record interest expense (premium amortization):Dr. Interest Expense – $48,000 / Dr. Premium on Bonds Payable – $2,000 / Cr. Cash – $50,000.

Interest expense equals the carrying value × market rate.

4. Classification of Long-Term Debt

Noncurrent liabilities are classified based on maturity:

✦ Noncurrent – Principal due beyond 12 months

✦ Current portion – Any part of the obligation due within the next year

✦ Reclassification – If a debt covenant is breached or refinancing occurs, reclassify if required by GAAP or IFRS rules

To reclassify portion due next year:Dr. Bonds Payable – $100,000 / Cr. Current Portion of Long-Term Debt – $100,000.

5. Settlement and Repayment

At maturity, the liability is settled by repaying the face value.

To repay bond at maturity:Dr. Bonds Payable – $1,000,000 / Cr. Cash – $1,000,000.

Early redemption may result in a gain or loss if the repurchase price differs from carrying value.

Dr. Bonds Payable – $1,000,000 / Dr. Loss on Redemption – $25,000 / Cr. Cash – $1,025,000.

6. Presentation and Disclosure

Balance sheet presentation:

✦ Bonds Payable – $1,000,000 ✦ Less: Discount on Bonds Payable – ($15,000) ✦ Net Bonds Payable – $985,000

Disclosures must include:

✦ Terms and maturity dates

✦ Interest rates and payment schedules

✦ Covenants and compliance status

✦ Fair value (if not carried at fair value)

✦ Amounts due in each of the next five years