Final answer:
A company issuing a $10 million bond would debit Cash and credit Bonds Payable for the issuance, and for the annual interest, they would debit Interest Expense and credit Interest Payable. Upon repayment, they would debit Bonds Payable and credit Cash. These principles apply to corporate and government debt issuance and repayment.
Step-by-step explanation:
Journal Entries for Issuance and Repayment of Debt
Issuance of debt, such as bonds, is a critical means by which organizations raise capital. Let's consider a scenario where a company issues bonds worth $10 million at an 8% annual interest rate, with the principal to be repaid after 10 years.
The journal entry to record this transaction involves debiting Cash and crediting Bonds Payable with the value of $10 million to show the inflow of cash and the corresponding liability that the company has undertaken.
Sample Journal Entry for Issuance:
- Debit Cash $10,000,000
- Credit Bonds Payable $10,000,000
The company would then annually record the interest expense, with a debit to Interest Expense and a credit to Interest Payable for $800,000.
At the end of the bond term, when the debt is repaid, the journal entry will involve debiting Bonds Payable and crediting Cash for the principal amount of $10 million to reflect the outflow of cash and the extinguishing of the liability.
Sample Journal Entries for Repayment:
- Debit Bonds Payable $10,000,000
- Credit Cash $10,000,000
If the bonds are reacquired before maturity, the entry will also include any gain or loss on the reacquisition.
Similarly, for government borrowing, such as Treasury bonds issuance by the Fed to Acme Bank, the accounting principles apply, except the context involves national finance management.