How does amortizing the discount on a bond payable affect the accounting equation?

Amortization is recorded either at the end of the fiscal year or each time interest is paid. The credit to Discount on Bonds Payable reduces that account and increases the carrying value of the bonds. The debit to Interest Expense increases interest expense.

What is the effect of amortizing a bond discount?

What is the effect of amortizing a bond discount? It increases the carrying value of the bonds.

How should discount on bonds payable be reported on the financial statements?

Discount (premium) on bonds payable should be reported in the balance sheet as a direct deduction from (addition to) the face amount of the bond. Both are liability valuation accounts.

How do you record discounts on bonds payable?

Accounting for Bond Amortization

If there was a discount on bonds payable, then the periodic entry is a debit to interest expense and a credit to discount on bonds payable; this has the effect of increasing the overall interest expense recorded by the issuer.

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What happens when you amortize a bond?

An amortized bond is one in which the principal (face value) on the debt is paid down regularly, along with its interest expense over the life of the bond. A fixed-rate residential mortgage is one common example because the monthly payment remains constant over its life of, say, 30 years.

What is the effect of amortizing a bond discount quizlet?

The amortization of a bond discount increases the carrying value of the bond issue because as the discount is reduced, the net amount, or carrying value increases.

What are the methods of amortizing discount or premium on bonds payable?

If the company uses the amortized cost approach to measure a long-term debt, it can use two methods to amortize the discount and the premium: the effective interest rate method, or. the straight-line method (allowed only under U.S. GAAP).

Will the amortization of discount on bonds payable increase or decrease bond interest expense explain?

Amortization is recorded either at the end of the fiscal year or each time interest is paid. The credit to Discount on Bonds Payable reduces that account and increases the carrying value of the bonds. The debit to Interest Expense increases interest expense.

Is discount on bonds payable a contra account?

The Discount on Bonds Payable account is a contra account because it is a liability account with a debit amount.

What does the balance in the discount on bonds payable account represent quizlet?

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond. … When a company sells bonds, the bondholders are permitted to vote for the board of directors.

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What does discount on bond payable mean?

The discount on bonds payable is the difference between the face amount of a bond and the reduced price at which it was sold by the issuer. This happens when investors need to earn a higher effective interest rate than the stated interest rate associated with a bond.

What does it mean to amortize the premium/discount and issue costs on bonds payable?

With regards to bonds payable, the term amortize means to systematically allocate the discount on bonds payable, the premium on bonds payable, and the bond issue costs to Interest Expense over the remaining life of the bonds. … The most precise way to amortize these is to use the effective interest rate method.

What is the effect of amortizing bond premium and bond discount on interest income?

The amount of the bond discount is amortized to interest expense over the bond’s life. As a bond’s book value increases, the amount of interest expense increases. The effective interest method considers the impact of the bond purchase price rather than accounting only for its par value or face value.

How does amortization of bond premium affect cost basis?

The basis of the taxable bond must be reduced to account for the amount amortized each year. c. The adjustment to cost basis for the amortization of premium impacts potential gain or loss upon disposition of the Bond (generally capital gain or loss if the taxpayer holds the Bond as a capital asset).

Why do you amortize a bond?

Because bonds sold at a discount will be repaid at their full face value, total bond discount is added back to arrive at the bond face value. … Bond discount amortization over time increases bond carrying value, which in turn increases the total interest expense.

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