Now we will look at bonds from the standpoint of the investor, instead of the bond issuer.
General
Points to remember:
·
Record
amount as Investment in Bonds (an asset). Include
any related costs, like brokerage fees as part of the amount.
·
Record
any interest owed to the seller from date of last interest payment to day of
purchase by debiting interest revenue.
·
Interest
received is recognized as interest revenue.
·
Any
premium or discount is amortized via charges to interest revenue and Investments
in bond using the straight-line method – usually at the end of the year.
(See separate handout.)
·
When
bonds are sold, compare the amount received to the carrying value and recognize
any gain or loss.
Example:
Smyth Company purchased a 1000 bond of the Whitney Corporation on March 1 at 84 plus a $15 brokerage fee and accrued interest. The bond pays 12% interest semi-annually on December 31 and June 30.
You should be able to:
· Record the purchase of the bond, including the accrued interest.
· Record the interest receipt.
· Amortize the discount or premium.
· Calculate the amount of interest revenue for the year.
Smyth holds the bond for three years. At the end of the third year, the bond is sold for $1150 plus accrued interest of $50. The carrying value of the bond (including amortization of the discount) is $968.
You should be able to:
· Record the later sale of the bond and the related gain or loss.