Accounting for Investment in Bonds

We will look at a similar topic but this time we, as a corporation, are purchasing bonds of another company.  We will not have a liability because we are the ones purchasing the bond or loaning the money.  We record this as an asset called Investment in Bonds.

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Let's look at another discount example.  Assume we purchase $50,000 in bonds of ABC Corporation for $45,000 cash.  The bonds have a stated interest rate of 10% paid semi-annually and the bond matures in 5 years.

To record the purchase of these bonds, we record the amount we actually paid for the bonds (we do not use discount or premium accounts):

Debit Credit
Investment in Bonds 45,000
   Cash 45,000
To record purchase of ABC company bonds for cash.
To record receipt of the semi-annual interest payment, we record the receipt of cash interest AND we capitalize the difference between the bond face value $50,000 and the amount we paid $45,000 of $5,000 over the life of the bond using straight-line amortization.  The entry would be:

Debit Credit
Cash (50,000 x 10% x 6 months / 12 months) 2,500
   Interest Revenue 2,500
To record bond interest received.
Investment in Bonds ($5,000 / 10 interest payments) 500
   Interest Revenue 500
To record capitalization of bond premium.
This entry would be made every 6-months for 10 interest payments.  At the end of 10 interest payments, Investment in Bonds account would be equal to the bond face value of $50,000.  The entry to record receipt of the bond amount at maturity would be:

Debit Credit
Cash 50,000
   Investment in Bonds 50,000
To record receipt of bond at maturity.
If we pay a higher price for the bonds than the bond face amount, the entries would be the same except we would Debit Interest Revenue and Credit Investment in Bonds with each interest payment.

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