How to account for debt issue costs

Written by carter mcbride
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How to account for debt issue costs
Debt costs require proper accounting procedures. (business accounts image by Nicemonkey from Fotolia.com)

When a company issues a debt instrument, there are often costs associated with the issue, known as debt issue costs. One of the most prominent debt securities a company issues is a bond. In issuing the debt, the company will incur expenses for legal fees, printing costs, underwriting and various accounting costs. The company must properly account for these fees or else they will violate rules under the Generally Accepted Accounting Principles (GAAP).

Skill level:
Easy

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Instructions

  1. 1

    Add together the total costs related to the debt. For example, let's say that a company incurs £6,500 incidental costs to issue a £65,000 bond. The bond sells for £617,500 at a £26,000 discount. The bond matures in five years.

  2. 2

    Debit "Cash" by the amount of cash received. Debit "Debt Issue Costs" by the amount of costs incurred. Debit "Discount" if the bond sells for a discount. Credit "Premium" if the bond sells for a premium. Credit "Bonds Payable" by the face value of the bond. This is the journal entry issuance of a debt security. This journal entry will go into the company's general ledger.

  3. 3

    Amortise the cost over the life of the debt. This moves the "Debt Issue Costs" from an asset on the balance sheet to an expense on the income statement. Use the straight-line method to amortise the cost. In this example, divide the costs by the maturity time of the bond, so £6,500 divided by five years equals £1,300 of amortisation a year. Debit "Debt Expense" by £1,300 and credit "Debit Issue Costs" by £1,300 each year of the bond. This is the journal entry to amortise the debt issue costs. This journal entry will go into the company's general ledger.

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