How Can I Calculate the Carrying Value of a Bond?

The current maturities of long-term debt should be reported as current liabilities if they are to be paid from current assets. The carrying value is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date. A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its balance sheet. A bond premium, like a bond discount, is allocated to expense in each period in which the bonds are outstanding. The difference between the issuance price and the face value of the bonds—the discount—represents an additional cost of borrowing and should be recorded as bond interest expense over the life of the bond.

This results in a bond premium of $2,000 ($100,000 – $102,000). Appendix 10D at the end of this chapter discusses the criteria used to determine the accounting treatment for contingent liabilities and leases. One example of this practice is leasing assets without showing the assets the balance in premium on bonds payable or related debt on the balance sheet. This ratio indicates the extent to which a company’s debt could be repaid by liquidating its assets. Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.

Financial Statements

Assume that a corporation prepares to issue bonds having a maturity value of $10,000,000 and a stated interest rate of 6%. However, when the 6% bonds are actually sold, the market interest rate is 5.9%.

This example shows how to account for bonds issued at a premium. Solvency ratios, such as cash-basis interest coverage, are improved relative to the issuance of par bonds. The cash eventually required to repay the obligations may become a significant burden. At the maturity date, the firm repays the face value of the bond. The treatment and effects of the last coupon payment are the same as those shown above.

Accounting for Bonds Issued at a Premium

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. Liabilities are extended to the balance sheet section of the worksheet. Hearst Newspapers participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This is because the full $100,000 is reported as a cash flow from financing. The interest expense of a discount bond increases over time due to the increasing carrying value.