Sale of Bonds Prior to Maturity

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 09, 2023

Explanation

Investors often sell bonds prior to their maturity. To record this sale, debit the cash account for the net proceeds received (sale price less commission and fees).

The investment in bonds account is also credited for the net carrying value of the bonds, and a gain or loss is recorded for the difference between the cash proceeds and the carrying value of the bonds.

If the bonds are sold between interest dates, the seller also receives the interest that has accrued since the last interest date.

Example

To illustrate, assume that the Cinzano Corporation decides to sell its bonds on 1 October 2022 for $11,500 plus accrued interest.

As of the last interest date, 1 July 2022, the balance in the investment in bonds account is $11,877, as shown in the T-account below:

Investment in Bonds T-Account


The first step is to record discount amortization for the three months from 1 July to 1 October 2022. This amounts to $12 ($4.14 x 3 = $12.42, rounded to $12) and it is recorded as follows:

Discount Amortization Entry


After this entry, the investment in bonds account now has a balance of $11,889 ($11,877 + $12). Because the firm sold the bonds for $11,500, it suffered a $389 loss, which is recorded as follows:

Loss on Sale Journal Entry


The cash proceeds of $11,800 represent the sale price of $11,500 plus 3 months' accrued interest of $300 ($12,000 x 5% x 3/6) that the buyer is paying the Cinzano Corporation.

There is a corresponding credit of $300 to the interest revenue account. This represents the cash portion of the interest revenue, and the $12 from the previous 1 October 2023 entry represents the amortized discount portion.

Thus over the 3-month period from 1 July to 1 October, interest revenue of $312 was earned by the Cinzano Corporation. Again, the loss is the difference between the carrying value of the bond and the sale price of $11,500, excluding interest.

Sale of Bonds Prior to Maturity FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.