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How do I record different bond activities?
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How do I record different bond activities?

By: Steve Nelson

How do I record a bond purchase?

Bond purchases work just like stock purchases. You record them in the appropriate account register by writing the terms of the purchase, including the date, the price paid for the bond, the commission paid, and the source of the funds, if you didn’t use the associated cash account.

The one somewhat tricky aspect of bonds is that bond prices are typically quoted as a percentage of the bond’s face value. For example, a bond price of 99.5 probably means the bond actually cost $995. The reason for this is that bonds typically have a face value of $1,000—this is not always the case, but is a good generalization—and the bond price is a percentage of the face value. Therefore, a bond price of 99.5 really says that the bond’s price is 99.5 percent of the bond’s face value. If the face value equals $1,000,
then the bond’s price equals $995.

Despite the confusing conventions used in describing bond prices, what you want to do is just keep everything simple. Use the actual dollar price—this is the amount you paid for the bond—as the bond price. Don’t enter the quoted price supplied by your broker. This isn’t the value that goes in the Price box.

How do I record bond interest?

In general, you record bond interest using a sequence of steps that closely resemble those for recording the dividend that a stock or mutual fund pays. Display the appropriate investment account register, and then indicate that you need to record a new investment transaction in the register. Describe the transaction by providing information such as the bond interest payment date, the amount, the account into which the money is deposited, and so forth. The one difference with a bond interest transaction is that the investment activity is listed as Interest rather than Dividend.
Everything else works in the same way as for a stock or mutual fund that pays a dividend.

How do I deal with zero coupon bonds?

If you invest in bonds, you may know that some bonds don’t actually pay periodic interest. Instead, these bonds, called zero coupon bonds, pay their interest when the bond matures. For zero coupon bonds, you need to annually accrue the interest on the bonds. The annual interest needs to be accrued because, by convention, you report the annual increase in the zero coupon bond’s value as interest earned.

To record accrued interest on a zero coupon bond, take the following steps:
1. Record the interest income that accrues.
Record bond interest that accrues in the normal way. In other words, whatever amount shows as being accrued—this should appear on the statement from your broker—record it as bond interest income.

2. Record a negative return of capital transaction equal to the accrued amount. After you record the bond interest that’s accrued, you need to record a return of capital transaction that adds this accrued interest back to the value of the bond. The amount of this capital transaction, obviously, needs to equal the accrued interest amount. But there is a twist here: You need to specify the return of capital amount as a negative value. For example, if you accrue $100 of interest on a zero coupon bond, you also need to record a return of capital transaction for the bond equal to
–$100.

By recording the return of capital transaction, you in effect transfer the bond
interest money from the associated cash account and add it back to the zero
coupon bond’s value. In this way the associated cash account shows the correct cash balance and the zero-coupon bond shows the correct cost basis. The zero coupon bond’s cash basis equals the original purchase price plus all the accrued interest that’s been recorded to date.

Article Source: http://articlenexus.com

Stephen Nelson is the author of do it yourself kits for Incorporating in Missouri, Missouri S corporation, and Missouri limited liability company.

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