When bonds are issued between interest dates, the issuer collects from the investor the interest that would have accrued for the partial period preceding the issue date. Describe two reasons why this procedure is followed
1. From a practical standpoint, if a company issued bonds on several different days and did not collect the accrued interest, records would have to be maintained for each bondholder and date of purchase. The interest due each bondholder would, therefore, have to be computed for a different time period. Clearly, this procedure would involve large bookkeeping costs. On the other hand, if accrued interest is collected when the bonds are sold, the corporation can pay the interest due for the entire period on the interest payment date, thereby eliminating the extra computations and costs.
2. When accrued interest is collected in advance, the amount is subtracted from the full interest paid on the interest payment date. Thus, the resulting interest expense represents the amount for the time the money was borrowed.
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