Have a premium. Happens when market interest rate is lower than bond rate (i.e., this particular bond pays lender better than other bonds in market).
Have a discount. Happens when market interest rate is higher than bond rate (i.e., this particular bond pays lender less than other bonds in market).
The effective interest on debt is the market rate of interest multiplied by the outstanding balance of the debt. The effective interest method says that interest expense recorded each period should be based on the market rate of interest rather than the stated rate.
Journal entry for issuance of bonds at a premium
Journal entry to record interest for bonds issued at a premium
When issuing bonds or notes, a company will incur debt issue costs and these costs include legal fees, accounting fees, printing costs, registration fees, and underwriting fees (i.e., fee paid to a commercial bank such as Wells Fargo).
At the time the bonds were sold, we reduce the debit to cash for the cash proceeds.
Sometimes bonds will be issued in the middle of a financial period. If this happens, the interest expense journal entry needs to be adjusted to reflect the partial period.
A zero coupon bond a bond that pays no interest. Lenders are compensated instead through a discount to the face amount of the bond. These bonds are conceptually the same as a non-interest bearing note, which we covered in Module 3.