Amortization coupon rate
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Bonds issued at par value are relatively simple to calculate and record. When a bond is issued at par value it is sold for the face value amount. The General Ledger : All transactions made by the company in relation to the bond must be recorded in its general ledger. The general ledger contains all entries from both the General Journal and the Special Journals.
When a business issues a bond, it participates in three types of transactions.
Bond Discount | Amortization Schedule | Journal Entries
First, the business issues the bond in exchange for cash. Next, it generally pays interest during the term of the bond. Finally, it pays off the obligation by repaying the face amount and the last interest payment. It is created by recording a credit equal to the face value of all the bonds that are issued. To balance this entry, the company must also debit cash equal to the face value of all the bonds issued.
Since the bonds are sold at par value, the amount of cash the company receives should equal the total face value of the issued bonds. When the company makes an interest payment, it must credit, or decrease, its cash balance by the amount it paid in interest. To balance the entry, the company must record a debit equal to the amount it paid in its bond interest expense account. When the bond is paid off, the company must record two transactions.
First, it must record any final interest payments that are made. Then, it must record the bond principal being paid off. This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond. For the issuer, recording a bond issued at a discount can be a little more difficult than recording a bond issued at par value.
Because the issuer receives less cash for the bond than the face value, this difference must be recorded in the company records as a discount expense. When a bond is sold at a discount, the market rate of the bond exceeds the contract rate. As a result, the bond must be sold at an amount less than its face value.
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In addition, that discounted amount must be amortized over the term of the bond. When the company amortizes the discount associated with the bond, it increases its interest expense beyond what it actually pays to the bondholder.
Amortization Schedule Calculator
Next, the company debits the cash account by the amount of money it receives from the bond sale. That is the discount amount. The journal entry for that transaction would be as follows:. As the company pays interest, the discount on the bond payable is amortized. Generally, the amortization rate is calculated by dividing the discount by the number of periods the company has to pay interest. The journal entry would be:. When the bond matures, the business must record the repayment of the principal to the bondholder, as well as all final interest payments.
At this time, the discount on bond payable and bond payable accounts must be zeroed out, and all cash payments must be recorded. The issuing company will still be required to pay the bondholder the interest payments guaranteed by the bond. Send Feedback. Mark Part 10 as Complete. PRO Testimonial. It not only provides all the essential material to succeed in learning accounting and finance, but also explains all the relevant details that make the difference when you need to understand the complexity of accounting systems.
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Identify yourself as a Bankrate consumer to get the Bankrate. An amortization schedule is a table that lists each regular payment on a mortgage over time. A portion of each payment is applied toward the principal balance and interest, and the amortization schedule details how much will go toward each component of your mortgage payment. Initially, most of your payment goes toward the interest rather than the principal. The schedule will show as the term of your loan progresses, a larger share of your payment goes toward paying down the principal until the loan is paid in full at the end of your term.
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