Corporatefinanceinstitute com 1 The Corporate Finance Institute Accounting For more eBooks please visit

corporatefinanceinstitute.com
51
The Corporate Finance Institute
Accounting
On January 1, 2017:
DR Cash: 860,653
CR Bond Payable: 860,653
The issuance of the bond is recorded in the bonds payable account. The 
$860,653 value means that this is a premium bond and the premium 
will be amortized over its life. 
On December 31, 2017:
DR Interest Expense: 86,065
DR Bond Payable: 9,935
CR Interest Payable: 96,000
The interest expense is the bond payable account multiplied by the 
interest rate. The interest payable is a temporary account that will be 
used because payments are due on January 1st of each year. And finally, 
there is a decrease in the bond payable account that represents the 
amortization of the premium. 
Therefore, on the balance sheet, the accounts would look like:
Bond Payable: $850,718
Interest Payable: $96,000
On January 1, 2018:
DR Interest Payable: 96,000
CR Cash: 96,000
Finally, the interest payable account is removed because cash is paid 
out. This payment represents the coupon payment that is part of the 
bond.

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corporatefinanceinstitute.com
52
The Corporate Finance Institute
Accounting
Interest Payable in Note Payables
Interest payable accounts also play a role in note payable situations. 
For example, let’s say that XYZ Company purchases a computer on 
January 1, 2016, paying $30,000 upfront in cash and a $75,000 note due 
on January 1, 2019. The interest rate is 10% and is paid on January 1st of 
each year. 
On January 1, 2016
:
DR Equipment 86,459
CR Cash: 30,000
CR Note Payable: 56,349
The note payable is $56,349, which equals to the present value of the 
$75,000 due on Dec 31, 2019. The present value can be calculated using 
Excel or a financial calculator.