April 1, 2004 Corporation, which has a 12/31 year end, authorized $1,500,000 of callable, mortgage bonds (secured by $2,200,000 of property and equipment, at market value). The bonds paid interest at a rate of 8% per year and had a term of 6 years. Interest is payable at 9/30, and 3/31. On 7/1/2005, Corporation issued 1,000 of the bonds in exchanged for $906,000 in cash. On 10/1/2007, Corporation called the bonds, and paid the existing bondholders $1,150,000 in cash.

I need to prepare journal entries for the period 4/1/04 through 12/31/05 and journal entry when the company redeemed the bonds on 10/2007. I know cash is $906,000 but how am I suppose to find the amount for bonds payable? Can anyone show me?

Bonds Payable is always the face value. How much was paid for them is irrelevant. The reason is that the payable represents how much they will have to pay back on the bonds, which is the face value.

The difference between that and the issue price is a discount or premium. In this case it's..

I wonder about what to do about the date of authorization and the date of issue? Is the interest payable from the date of issue or from the date of authorization?

Interesting question with respect to the authorization date. Since the "interest clock" generally begins to run on the issue date, I'd guess that for 2004 there's no JE... maybe just a footnote re the authorization of the proposed financing?

Does GAAP / IFRS have any disclosure requirements re an authorized, but unissued, bond issuance?

I would like you to please refer books on Intermediate Accounting by Keiso as well as Chasteen.

According to both the authors, when the bonds are issued at a date (July 1, 2005) falling after the authorization date (April 1, 2004), the payment received on the issue of bonds will also include the amount of interest for the intervening period. I have assumed that the bonds are dated when authorized. I know 15 months is quite a long time between the authorization and issue dates. Let us ask Bobcat about the date of the bonds.

Interesting. Certainly, if a bond is issued at an interim date, then the issue price would include an adjustment for the "short period". For example, if a bond which pays a $100 coupon every Jun 30 and Dec 31 is originally issued on Mar 31 at par, the purchaser would pay an extra $50 to the issuer over par on Mar 31, as the purchaser will be receiving a $100 coupon payment in just 3 months.

Thus, if a bond issue is first authorized on Jan 1, the coupon dates are set for Jun 30 and Dec 31, and then the bonds are issued on Mar 31, then there's certainly an issue-price 'adjustment' for the period from the authorization date to the issue date. But that's actually just a function of issuing the bonds on a date other than a regular coupon date, and has nothing to do with the authorization date, which just happened to coincide with a coupon date.

Could this be the "intervening period" referred to by the authorities you cite? Because with all due respect to Messrs Keiso, Chasteen, et al. neither they nor GAAP determine when the interest clock begins running on a debt instrument--that's solely a function of the contractual provisions of the instrument itself (the bond indenture, in this case). For example, if I make a firm decision this afternoon to borrow money from the bank, that's analogous to my "authorization" to execute this transaction. Suppose further that I actually drive to the bank sometime next week to take out the loan. If the loan officer hands me the money, and informs me that I already owe them 7 days' of interest, because I 'decided' to borrow the money last week, well... I think the judge would decide I had "reasonable cause" for the assault :)

Now to bring this analogy more in step with a bond scenario: Suppose that all of this bank's loans are written so that interest begins on the first day of the month in which the loan is obtained, but that 'interim periods' are adjusted at the issuance of the loan. For example, I borrow the money on the 10th of the month. On the last day of the month my first interest payment is due, and I'll be writing a check for a full month's interest. In recognition of this, on the day I receive the loan the bank gives me the loan proceeds plus extra cash equal to 10 days' worth of interest, to reimburse me for the "overpayment" I'll be making at the end of the first month. That kind of "issue date adjustment" is analogous to an adjustment made for a bond originally issued between scheduled coupon dates.

So I'm wondering if perhaps the "intervening period" discussed in Keiso refers to a "between coupon dates" period?

BTW, very interesting discussion... enjoying it!

Mmm, curious. I am going to have to go look that up, since I have Keiso. I don't recall learning anything about authorization dates.

Bobacat... now that I am looking at this again, I realize that in answering the only question you actually asked (how much to record for the bond payable), I didn't really notice why you were having difficulty knowing how to get that amount. I just thought you didn't know it should be at the face value. But I see now the problem doesn't say how much each bond is worth! So in other words, you don't know the face value of the 1000 bonds. I don't see any way to figure that out.

(And then of course, there are all the other confusing issues involved, as you can see from these posts, but that still leaves you original question of the bond payable as a difficulty.)

Quickie note to Bobacat... my book did say bonds were "usually" in $1000 increments. Even though they aren't always, perhaps your book as given an amount they want you to use in all problems? Sometimes books will work on certain assumptions and not bother telling you anything else exists, so you go on that assumption for everything.

Anyway... I can't find one thing about the authorization date in Keiso. It just talks about the typical between-interest-date stuff. I tried doing a Google for it, but found nothing on this.

A couple of places did, however, mention an issuance subsequent to the authorization. But then they went on to talk about usual between-interest date handling of it, and nothing that would back it up further than the last interest date. One of them simply mentioned that you would only expense the portion from issue date to next interest date, which is of course how it comes out in the end, but it didn't detail how to record it. Another reference, when discussing the buyer paying a portion of interest up front, then said the full six month interest payment would be made back to the buyer. In other words, just the same old normal six-month deal, and nothing that would take it back further than that.

I find no logic (logistically or accounting-wise) in a buyer having to pay interest clear back to an authorization date and then paying it back to them along with their usual interest. The entire purpose of the interest being prepaid is to be able to make the normal six-month payment and simplify things. Property tax works the same way.

I agree with ArcSine on this. So in this instance, at issuance the buyer would just be paying the 3 months like normal.

(That still doesn't solve our face value problem.)

Bobacat, if we have scared you off with all this technical garbage about interest, don't worry -- someone can simplify it for you if you need that.