Why are the issue costs of bonds reported as an asset?

The costs associated with issuing bonds should be matched to the accounting periods that will benefit from the bonds. For example, if a corporation incurs bond issue costs of $150,000 in order to issue $5,000,000 of bonds maturing in 15 years, the corporation should report an annual Bond Issue Costs Expense of $10,000 ($150,000 divided by 15 years).

Since the corporation must pay the bond issue costs of $150,000 when the bonds are issued, but can expense only $10,000 per year, the bond issue costs need to be deferred to a long-term asset account. In effect the bond issue costs are prepaid expenses, which are part of the definition of assets. (Recall, that the payment of a 6-month or 12-month insurance premium is reported as a current asset until it expires and is then expensed.)

The journal entry for the bond issue costs will initally be a debit of $150,000 to Bond Issue Costs and a credit to Cash or Accounts Payable. Then each year that the bonds are outstanding there needs to be an accounting entry to credit Bond Issue Costs for $10,000 and to debit Bond Issue Costs Expense. This is referred to as amortization and it results in the balance in the long-term asset account Bond Issue Costs being reduced to $0 by the time the bonds mature.

Learn more about Bonds Payable.

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