| (1) Unissued First Mortgage Bonds | $500,000.00 | |
| First Mortgage Bonds Payable | $500,000.00 | |
| (2) Cash | 350,000.00 | |
| Unissued First Mortgage Bonds | 350,000.00 | |
Entry (1) is used to make a memorandum entry of the authorized issue. Entry (2) shows the amount sold for cash. The balance in the Unissued Bond account is treated as an offset to the Bonds Payable account. Sometimes the title “Treasury Bonds” is used instead of “Unissued,” but the term is apt to be misleading because of the restricted meaning given the word in connection with treasury stock.
Second Method
| (3) Cash | $350,000.00 | |
| First Mortgage Bonds Payable | $350,000.00 |
Under the second method, the desired information as to authorized issue would be carried parenthetically in the account title. At the present time the tendency is to deprecate an unnecessary multiplication of accounts as is brought about through the use of memorandum accounts. The second method is therefore the preferred method and in its operation brings onto the books the same information as the first method.
Entry of Premium or Discount on Books
Bringing the bond premium or discount onto the books is accomplished in the same manner as for stock. Thus, using the above data and assuming $100,000 of the bonds sold at 101 and the remaining $50,000 at 99¾, the entries would be, illustrating only the second method:
| (4) Cash | $101,000.00 | |
| First Mortgage Bonds Payable | $100,000.00 | |
| (5) Cash | 99,750.00 | |
| Discount on First Mortgage Bonds Payable | 250.00 | |
| First Mortgage Bonds Payable | 100,000.00 | |
Subsequent handling of the premium and discount accounts will be shown on page 368.
Bonds may be issued for cash or property, as in the case of stock. Unless there is evidence to the contrary, when bonds are issued for property they are brought onto the books at par value, the courts holding here as with stock that the parties to the transaction (usually the corporation’s directors) are in a better position to judge the value of the property taken over than anyone else. This oftentimes results in an inflation of property values—an injection of water—and should not be countenanced where a true basis for determining the value of the bond is offered. Thus, if almost simultaneously with the issue of the bonds for property, some are sold for cash, the cash price received would usually be a fair basis for booking the premium or discount on those issued for property. The sale for cash must be a bona fide sale in the open market if it is to represent the market’s judgment of the offering. Sometimes an objection is raised to a Bond Discount account appearing on the books; hence the practice, wherever possible, of charging the discount against some asset account as a part of the cost of that asset. When the true nature of bond discount or premium in its relation to the periodic interest charge is appreciated, the objection has no weight.