When you issue a bond payable, you sign an agreement with a lender to repay the face value of the bond along with any interest at a future date. Before issuing the bond, calculate the interest expense you'll incur to know the amount of cash you'll need to meet the interest payments. You don't need a background in mathematics or accounting to calculate interest expense -- it can be done in just a few simple steps.
Calculating Interest on a Bond Payable
Review the bond agreement to obtain the necessary elements to calculate the interest expense payments you'll make in the future. On a separate sheet of paper, write down the essential details including the bond's interest rate, the bond's face value and the maturity date of the bond.
Calculate the monthly interest on the bond using the simple interest formula: principle x interest rate x time. Express time in the formula with the frequency of the interest payment. If the bond agreement requires that you make interest payments semi-annually to the lender, show time in the formula as 6/12.
Assume that you signed a one-year bond for $40,000, with an interest rate of 8 percent that is due semi-annually. Calculate interest on the bond using the information from step 1 and the formula from step 2 as follows: $40,000 x 8 percent x 6/12. The interest expense that you will pay semi-annually on the bond payable is $1,600.
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