Bond interest expense journal entry
Overview
Interest expense is a type of expense that incur throughout the passage of time. Likewise, the bond interest expense will incur on the day that the company issuing the bond throughout the period of the bond. Hence, the company needs to make the journal entry for the bond interest expense at the period-end adjusting entry.
The company records the bond interest expense in the journal entry at the end of the accounting period in order to recognize the interest expense that has already occurred as well as to recognize the liability that it owes to the bondholder. If the journal entry is not made, both total expenses on the income statement and total liabilities on the balance sheet will be understated.
Bond interest expense journal entry
The company can make the bond interest expense journal entry at the period-end adjusting entry by debiting the interest expense account and crediting the interest payable account.
| Account | Debit | Credit |
|---|---|---|
| Interest expense | $$$ | |
| Interest payable | $$$ |
The interest expense is an income statement item while interest payable is a liability on the balance sheet.
Later, when the company makes the interest payment to the bondholder, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Interest payable | $$$ | |
| Cash | $$$ |
This journal entry is made to eliminate the liability that the company has recorded in the prior period.
Bond interest expense example
For example, on January 1, 2020, the company ABC issue a $100,000 bond with the interest of 8% p.a. at face value. The bond has a maturity of five years and the company will pay the annual interest on January 1 every year, starting from January 1, 2021, until the end of the bond maturity.
In this case, the company ABC will need to make the journal entries for the bond and bond interest expense transactions as following:
On January 1, 2020
When the company issues the $100,000 bond, it will make the journal entry as bellow:
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Bonds payable | 100,000 |
On December 31, 2020
The company ABC will make the bond interest expense journal entry on December 31, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 8,000 | |
| Interest payable | 8,000 |
This journal entry is made to recognize the one-year interest expense that has occurred in 2020 as well as to record the liability it owes. If this journal entry is not made, both total expenses and total liabilities in the 2020 financial statements will be understated by $8,000.
On January 1, 2021
When the company makes the bond interest payment, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Interest payable | 8,000 | |
| Cash | 8,000 |