| Bond Interest | 2,750.00 | ||
| Bond Discount | 250.00 | ||
| Cash | 2,500.00 | ||
3. Cancellation or the Bonds at Maturity. When the bonds come due and are paid, the record is the same as the cancellation of any other liability, viz.,
| Bonds Payable | 100,000.00 | ||
| Cash | 100,000.00 | ||
Bond Premium.—Bonds are also often sold at a premium. As with discount, the premium is intimately related to the interest rate which the bonds bear. At the time of the sale of bonds, the premium is brought on the books as a credit, which together with the par value at which the bonds are booked, offsets the cash received from their sale. At the regular interest periods the premium is amortized over the life of the bonds and so results in a lessening of the periodic bond interest charge. The student should set up the entries to record the sale of bonds at a premium and the interest payment for such bonds.
Sinking Fund.—The sinking fund is a fund of liquid assets created by periodic sums, usually of equal amounts, set aside during the life of a bond issue or other liability to provide ready funds for the cancellation of the liability at maturity. This method is very commonly followed in public finance and is not infrequent in private corporations. It is not purposed here to explain the methods of determining what periodic sum is necessary to be set aside so that these principal sums and their interest accumulations will provide sufficient funds for the cancellation of the liability at maturity. Nor will the complicated problem of sinking fund investments in the hands of a trustee, and the expense and income arising out of it, be discussed here. These and related problems are covered fully in Chapter XXV, Volume II. Only the creation of the fund and its final disposition are treated here, under two heads as follows:
1. Creation of the Fund. Assume that $1,000 cash is set aside at the end of each six months to provide for the retirement of the bonds at maturity. The entry for this, every six months, will be:
| Sinking Fund | 1,000.00 | ||
| Cash | 1,000.00 | ||
2. Cancellation of the Bond Liability. The student will understand that the cash set aside periodically for the sinking fund will be invested in securities in order to accumulate an income, which usually accrues to the fund. The securities in the fund must be sold just before the maturity of the bond issue, in order to provide cash. It will be assumed that in this instance the securities in the fund have been sold, that the cash in the sinking fund at the time of maturity is $101,500, and that the bond issue to be retired is $100,000. The entries will be:
| (a) Bonds Payable | 100,000.00 | ||
| Sinking Fund | 100,000.00 | ||
| (b) Cash | 1,500.00 | ||
| Sinking Fund | 1,500.00 | ||
Entry (b) returns to the general cash the unused cash in the sinking fund. In case of a deficiency in the sinking fund it will be necessary, of course, to draw on the general cash for the amount of the deficiency.