Relationship Between the Bond Coupon Rate and The Prevailing Market Rate(Effective Interest Rate)
(1) Bond coupon rate = Market Rate(Bond is issued at PAR)(2) Bond coupon rate > Market Rate(Bond is issued at premium)(3) Bond coupon rate < Market rate(Bond is issued at discount)If the bond is issued between interest payment dates, the bondholder will pay the amount of the bond and accrued interest.Any accrued interest received by the issuing corporation will be recorded as a current liability.This amount will be repaid to the bondholders along with the first payment (semi-annually) thatis made. The payment made is allocated between accrued interest payable and bond interestexpense.
Bond issued with a face amount of $100,000 for 10 years. Bond is issued at 88%. This bond isissued at a discount because it is less than 100%.
Each bond issued
1,000 * 88% = 880(1)Record entry for the issuance of the bond:Cash (100,000 * 88%)88,000Discount on Bonds12,000Bonds Payable (Face Amount)1000,000Discount on Bonds-A contra-liability account Normal Balance is a debit.To increase the account it is debited.To decrease the account it is credited.The total interest expense to be repaid over the life of the bonds is initially recorded in thediscount on bonds account. As the bonds remain outstanding, interest expense must be recordedthrough the amortization of bond discount.2