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Monday, January 14, 2013

Journal Entry for Zero Coupon Bonds


Zero coupon bonds are the famous type of bonds in which the company will gives only face value without paying any extra discount. Investor gets earning buy getting the zero coupon bonds at discount. This discount will be the income of investor and second side, company has to show it as interest which not in cash but it is 
the part of face value of zero coupon bonds. So, for accountant, it is very necessary to understand the the journal entry or entries of zero coupon bonds. Before passing the journal entry, we should understand the the basic terms in zero coupon bonds.

1. Face Value 

Face value is the future value which will be paid by company to the investors who invested their money in zero coupon bond. This bond is just like loan which is taken by company. At the time or repayment, this face value will be paid by company.

2. Present Value or Principle 

Company sells his zero coupon bond product on the discount. Difference between the face value and discount will be the present value or principle value. If we have to pay Rs. 1 at the end of the year with 10% interest, its present value at the beginning of the year will be Rs. 0.99

3. Discount or Interest 

Discount is the main earning of the investor of zero coupon bond because investor will not get any extra interest. This discount can be converted into interest or interest can be converted into discount. If we have to calculate per year interest by converting discount, we will calculate on the basis of compound interest formula.

Now, we are ready to pass the journal entries of zero coupon bonds.

For example, A company issues $ 20,000 zero coupon bond in the market. Mr. David bought it at the discount of  $ 3471. It means Mr. David bought it at $ 16529 at 10% per year his earning. At the end of second year, company has to pay only face value of $ 20000.



At the beginning of the year

1. When company gets the present value of zero coupon bond from investor Mr. David





Cash Account Debit 16529

Zero coupon Bond Payable Account Credit 16529





At the end of 1st year 

2. When the company pass the entry of interest payable




Interest Account Debit 1653

Zero Coupon Bond Payable Account Debit 1653




{Interest of Ist year will be calculated on the present value }

At the end of 2nd year

3. When the company pass the interest payable of second year


 Interest Account Debit 1818

Zero Coupon Bond Payable Account Credit 1818


Second year interest will be calculated on the ( present value 16529  + Ist year interest 1653 )

4. When the company pays the face value of zero coupon bond ( Present value 16529 + payable interest 3471)


Zero Coupon Bond Payable Account Debit 20000

Cash Account Credit 20000