Question: Why is discount on bonds payable a contra liability?

When a bond is sold at a discount, the Discount on Bonds Payable contra liability account carries the difference between the reduced price at which the bond was sold and its face value, which is the principal amount that the issuer will be required to pay back at maturity.

Is a discount on a bond payable a contra liability?

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. … The amount of this discount is stored in a contra liability account, which is paired with and offsets the bonds payable account.

Why bond discount is a liability?

If a bond is sold at a discount, for instance, at 90 cents on the dollar, the issuer must still repay the full 100 cents of face value at par. Since this interest amount has not yet been paid to bondholders, it is a liability for the issuer.

Is bonds Payable a contra asset?

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

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What is a discount on bonds payable?

Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity. This amount, called its par value, is often $1,000. The primary features of a bond are its coupon rate, face value, and market price.

Is bonds payable a liability?

Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. This account typically appears within the long-term liabilities section of the balance sheet, since bonds typically mature in more than one year.

What is the opposite of discount on bonds payable?

The premium or discount on bonds payable is the difference between the amount received by the corporation issuing the bonds and the par value or face amount of the bonds. If the amount received is greater than the par value, the difference is known as the premium on bonds payable.

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

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.

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.

Where does discount on bonds payable go?

Discount on bonds payable is a contra account to bonds payable that decreases the value of the bonds and is subtracted from the bonds payable in the long‐term liability section of the balance sheet.

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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.

Is sales discount a contra account?

The sales discount account is a contra revenue account, which means that it reduces total revenues.

What are the normal balances for discount on bonds payable?

The normal balance of the Discount on Bonds Payable is a debit, and it is subtracted from the Bonds Payable account to determine the carrying amount.