Final answer:
Bonds should be recorded on the balance sheet at their face value when they are issued, as this amount represents the legal liability that the issuer must repay. Key components of a bond include the face value, coupon rate, and maturity date. The present value may differ from the face value.
Step-by-step explanation:
The question is asking whether bonds should be recorded at their face value on the balance sheet at the time of issuance. In financial accounting, a bond is considered a debt instrument that a company can use to raise capital. The bond has several key components: the face value, coupon rate, maturity date, and the present value.
The face value is the principal amount of the bond that is repaid to the investor at maturity. The coupon rate is the interest rate paid on the bond, typically on a semi-annual basis. The maturity date is when the bond issuer returns the face value to the investor along with the last coupon payment.
When issuing a bond, the borrower receives capital equal to the face value of the bond. According to principles of accounting, the bond should be recorded at its face value on the balance sheet when it is issued, because this represents the legal amount the company must repay.
The calculation of the present value of a bond, which involves discounting future cash flows by the market interest rate, helps to determine what an investor is willing to pay for the bond. However, this present value may differ from the bond's face value and is more relevant for pricing the bond in the market than for its initial record on the balance sheet.
For example, if a bond with a face value of $3,000 is issued at an interest rate of 8%, it will be recorded on the balance sheet at the $3,000 face value. Even though the bond may be bought and sold at different values over its life due to changing interest rates, at issuance the face value equates to the present value for both the borrower and the lender.