Proceed From Issuing of Long-term Debt
Proceed from Issuing of long-term debt is the cash flow received from selling the debt instrument to the capital market. The company can raise capital from both debt and equity. Equity refers to the process of raising capital by selling common shares and preference shares. The company shares part of its ownership to investors in exchange for capital investment. Debt is another way of raising money from investors, it simply means the company borrow cash from investors and promise to pay it back over time. Company issue the debt instrument such as a corporate bond, step-up bond, certificate deposit, and so on.
A debt security is a financial instrument that can be traded between two parties in the capital market. Instead of borrowing money from the bank or creditor, company sells the debt instrument to the public. The company must pay interest and principal to investors based on bond terms and conditions. The bond usually requires the issuer to pay annual interest while the principal will be paid on the maturity date. However, it can be slightly different due to the type of bonds.
For the investors, they are entitled to receive an annual interest base bond coupon rate. If they want to receive the principle early, they can resell the bond to the capital market. The price of a bond depends on coupon rate, market interest rate. When the bond rate is higher than the market, many investors will try to buy, so it will skyrocket the price. On the other hand, a lower interest rate will decrease the price of bonds.
Proceed From Issuing of Long-term Debt Journal Entry
When the company issues long-term debt such as a bond or other instruments, they need to make the journal entry into the recording.
The company needs to make journal entries by debiting cash and crediting long-term debt. Cash is the amount that company receives from selling the instrument to the market. Long-term debt will be present on the balance sheet under the liability section.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Long-term Debt | 000 |
Example
Company ABC needs to raise $ 10 million to invest in a new project. After the board meeting, the company decided to fund 60% of this project by debt while the remaining 40% will be funded by retained earnings.
On Jan 202X, Company issue 6,000 bonds at $ 1,000 par value. The company raises a total of $ 6 million from selling bonds. This total of $ 6 million is the proceed from issuing of bond which is the long term debt.
Journal Entry of Proceed from issuing the bond
| Account | Debit | Credit |
|---|---|---|
| Cash | 6,000,000 | |
| Long-term debt_Bond | 6,000,000 |
Proceed From Issuing of Long-term Debt on Cash Flow
When the company issues long-term debt, there will be a cash flow into the company. So it will impact the cash flow statement. It will be a cash inflow under financing activity. The amount of cash received will present as the positive side and it will net off with other cash outflows such as cash paid to creditors.
The amount shown on cash flow will not include the other issuing cost that happens during the process. These costs will present on the income statement as expenses during the year. However, some companies may amortize them over the bond term.
In the process of issuing long-term debt, the company will incur some costs such as legal fees, accounting fees, registration,n and underwriting fees. These fees need to account properly. If it is already treated as an expense in the income statement, it must not appear in cash flow on financing activity, otherwise, it will be double count.