Accounting for Bond Investments—Purchase, Interest,
and AmortizationBonds may be purchased either directly from the issuing corporation or through an or-
ganized bond exchange. Bond exchanges publish daily bond quotations. These quota-
tions normally include the bond interest rate, maturity date, volume of sales and the
high, low, and closing prices for each corporation’s bonds traded during the day.
Prices for bonds are quoted as a percentage of the face amount. Thus, the price of a
$1,000 bond quoted at 99.5 would be $995, while the price of a bond quoted at 104.25
would be $1,042.50.
As with other assets, the cost of a bond investment includes all costs related to the
purchase. For example, for bonds purchased through an exchange, the amount paid as
a broker’s commission should be included as part of the cost of the investment.
When bonds are purchased between interest dates, the buyer normally pays the
seller the interest accrued from the last interest payment date to the date of purchase.
The amount of the interest paid is normally debited to Interest Revenue, since it is an
offset against the amount that will be received at the next interest date.
To illustrate, assume that an investor purchases a $1,000 bond at 102 plus a bro-
kerage fee of $5.30 and accrued interest of $10.20. The investor records the transaction
as follows:The cost of the bond is recorded in a single investment account. The face amount
of the bond and the premium (or discount) are normally not recorded in separate ac-
counts. This is different from the accounting for bonds payable. Separate premium and
discount accounts are usually not used by investors.
When bonds held as long-term investments are purchased at a price other than the
face amount, the premium or discount should be amortized over the remaining life of
the bonds. The amortization of premiums and discounts affects the investment and in-
terest accounts, as shown below.Premium Amortization: Discount Amortization:
Interest Revenue XXX Investment in Bonds XXX
Investment in Bonds XXX Interest Revenue XXXThe amount of the amortization can be determined by using the straight-line
method. Unlike bonds payable, the amortization of premiums and discounts on bond
investments is usually recorded at the end of the period, rather than when interest is
received.
To illustrate the accounting for bond investments, assume that on July 1, 2007,
Crenshaw Inc. purchases $50,000 of 8% bonds of Deitz Corporation, due in 8–^34
years. Crenshaw Inc. purchases the bonds directly from Deitz Corporation to yield
an effective interest rate of 11%. The purchase price is $41,706 plus interest of
$1,000($50,0008% 12 –^3 ) accrued from April 1, 2007, the date of the last semiannual550 Chapter 12 Special Income and Investment Reporting Issues
2007
Apr. 2 Investment in Lewis Co. Bonds 1,025.30
Interest Revenue 10.20
Cash 1,035.50SCF BS IS
IT AcT SET RT