Bond issue costs are the fees associated with the issuance of bonds by an issuer to investors. The accounting for these costs generally involves initially recording them as assets and then charging them to expense over the life of the bonds. Bond issue costs may include:
- Accounting fees
- Legal fees
- Printing costs
- Registration fees
- Underwriting fees
These costs are recorded as a long-term asset on the balance sheet (probably in an Other Assets line). The costs are then charged to expense over the life of the associated bond, using the straight-line method. Under this amortization method, you charge the same amount of the asset to expense in each period over the life of the bonds. The full period over which bond issue costs should be charged to expense is from the date of bond issuance to the bond maturity date.
The amount of bond issuance costs charged to expense appears in the income statement in the period in which the charge is recognized.
We use this accounting treatment because, under the matching principle, we recognize expenses at the same time that we recognize the benefits associated with those expenses - thus, the benefit of having the bonds outstanding in any given year is matched with a portion of the original bond issue cost.
You would not record these costs as a current asset, since they are not going to be charged to expense entirely within the next year.
An alternative treatment when bond issuance costs are immaterial is to charge them to expense as incurred.
If a bond issuance is paid off early, then any remaining bond issuance costs that are still capitalized at that time should be charged to expense when the remaining bonds are retired.
Bond Issuance Cost Example
For example, ABC International incurs $50,000 to issue bonds. The bonds will be retired in 10 years. Accordingly, ABC initially records the bond issue costs as a long-term asset, with a debit to the bond issuance costs asset account and a credit to the cash account. Later, it charges $5,000 to expense in each of the next 10 years, with a debit to the bond issuance expense account and a credit to the bond issuance costs asset account. This series of transactions effectively shifts all of the initial asset into the expense account over the period when the bonds are outstanding.