When a company decides to borrow the capital it needs by issuing bonds, it usually has debt issue costs. Debt issue costs cover legal expenses, the fees paid to investment banks that underwrite the debt instrument and all other costs related to issuing the debt security. Under generally accepted accounting principles, debt issue costs must be accounted for separately from the underlying debt.
Journal Entries for Issuing Bonds
Suppose your company borrows $1 million by offering 10-year bonds to the investing public. If you pay a lawyer $10,000 to assist with the U.S. Securities and Exchange Commission filings, her fee is treated as a debt issue cost. Under these circumstances, you make a debit entry of $1 million to a cash account to reflect the capital borrowed and second debit for $10,000 to a “Debt issue costs” account -- which is also reported as an asset on the balance sheet. You then amortize his $10,000 over the 10-year period and write it off as an annual expense of $1,000 on the income statement.