Question

What are government bonds and how they are accounted for? Be sure to explain face value, premiums and discounts, and issue costs. Provide examples.

ORIGINAL ANSWERS, PLEASE.

Answer 1

Ans:

Government Bonds-

Government bonds are the governement issued debt security that represents debt and are sold to investors to support government spending and obligations. Some government bonds pay periodic interest payment also called Coupon payments while some bonds are sold at discount.. SInce they are backed by government, they are low risks investments and considered to be most safe and thus offer low interest rate. They are also known as sovereign debt.

Face Value- The amount provided by the issuer to the bond holder on the date of maturity is the face value of the bond. E.g Par value or face value of the bond is typically $100 or $000.

Premium- When a bond is trading at a price more than that of its face value then it is said to be trading at premium. E.g Face value of bond is $100 and the bond is trading at $120, then the premium on bond is $20 ($120-$100)

Discounts- When the market price of the bond is lower than its face value then the bond is said to be at discount. E.g Face value of bond is $100 and the bond is trading at $98, then discount on bond will be $2 ($100-$2)

Issue cost- Cost associated with the issuance of bond by an issuer to investors. these may include their initial capitalization and charging them to expense over the life of bond or printing cost..

Acounting for Government bonds-

1. When an investment is made in government bonds, the journal entry would be a debit to Debt Investment and corresponding credit to cash account. E.g A 10%,ten year, $100 bond is issued at $500

Account Name	Debit	Credit
Debt Investment	$500
Cash		$500
(Being investment made in bonds)

2. When interest is received on government bonds, the journal entry would be a debit to cash account and corresponding credit to Interest revenue account. Interest entry from above example will be

Account Name	Debit	Credit
Cash	$50
Interest Revenue ($500 * 10%)		$50
(Being interest received on bonds)

3. Bonds held to maturity- Bonds hel to maturity are classified as long term Investment and the difference between the maturity value and cost of the bond is amortized to the income statement over the life of the bond.

4. Bonds held for sale- Bonds held for sale, their valu changes as the market changes. The difference between the book value and the sale proceeds is recorded as gain or loss.