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
Step 1
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.
Step 2
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.
Step 3
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.
