Bond Issue Costs
The fees associated with issuing a bond to an investor.
Bond Issue Costs Details
When you issue a bond to an investor or lender, you borrow money from them to accomplish something. You could need the money to build a new building or develop the company. As you create and sell a bond, you incur bond issue costs. You then record these costs by capitalizing them at first and then debiting them to an expense account over the life of the bond. Bond issue costs are made up of many different things. Some of the following are all connected to bond issue costs.
- Accounting fees
- Legal fees
- Printing costs
- Registration fees
- Underwriting fees
An accountant records all of these costs need on the balance sheet as a deduction from the bond liability. Then the fees are charged to the expense account over the life of the bond. You need to charge the same amount to the expense account, either monthly or yearly, for the bond's life. The life of the bond starts from the date you sell/issue it to its maturity date. Each charge needs to be the same amount to spread the bond issue costs equally to the expense account. If, for some reason, a bond is paid off early, then any remaining costs still capitalized need to be charged to expense when the other bonds are retired.
Example of Bond Issue Costs
XYZ Inc. issues several bonds with a 10-year life span, and it costs $50,000 to do so. XYZ Inc. capitalizes the costs by debiting the bond issuance costs account and credits the cash account. For the next ten years, XYZ Inc. charges $5,000 to expense by debiting the bond issuance expense account and crediting the bond issuance costs account.
Bond Issue Costs vs. Bonds Payable
Bonds payable are a form of debt usually done by corporations, hospitals, and governments. The company, hospital, or government department that issues the bond formally promises to regularly pay interest and pay the principal amount after the bond has reached maturity.
Public utilities will issue bonds to pay for a new power plant. Hospitals use bonds to finance new buildings. Governments issue bonds to have the money for projects, operating deficits, or payout older bonds that are maturing.
There are several reasons corporations give out bonds instead of common stock. One reason is that common stock is more costly than the debt a bond generates. Another is that interest on bonds is deductible when it comes to income taxes. And yet another reason is that bondholders are not owners. The bondholder is simply an investor or lender. Since they are not owners, they do not have a say in what the company does. Nor will the ownership interest of the existing stockholders become diluted.
So bonds payable are when the corporation, hospital, government department, or whoever issued the bond needs to pay back the money on the bond issued. But bond issue costs are what it costs to prepare, create, and sell the bond in the first place.
Significance of Bond Issue Costs
Bond issue costs are the tip of the iceberg when it comes to using bonds. All the costs incurred are to get the bond created and sold. A corporation needs to be especially aware of all that goes into issuing and paying back a bond so that it does not create problems later.