The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.
What does the balance in the discount on bonds payable account represent?
The discount on bonds payable is the difference between the cash received and the maturity value of the bonds and represents additional interest expense to Lighting Process, Inc. (the company that issued the bond).
What type of account is discount on bonds payable quizlet?
Discount on bonds payable is a contra liability account, because it is contrary to the normal credit balance. Its normal balance is Debit balance. Discount on bonds payable account is added to determine the carrying amount.
How would the balance of the discount on bonds payable account usually be reported in the balance sheet?
The balance in the discount on bonds payable account would usually be reported on the balance sheet in the: Current assets section.
What is the effect of amortizing a bond premium quizlet?
What is the effect of amortizing a bond premium? Its effect on the carrying value of bonds cannot be determined without knowing the maturity date of the bond. It does not affect the carrying value of the bonds. It increases the carrying value of the bonds. It decreases the carrying value of the bonds.
When bonds are issued at a discount the bonds payable account is credited for?
When bonds are issued at a discount, the bonds payable account is credited for the proceeds from the issue. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate. Amortization of bond premium reduces the balance in bonds payable.
How do you find the discount on bonds payable in accounting?
Each interest payment per period is 1.75% x $1,000 = $17.50. The sum of the present value of coupon payments and principal is the market price of the bond. Market Price = $862.30 + $96.39 = $958.69. Since the market price is below the par value, the bond is trading at a discount of $1,000 – $958.69 = $41.31.
What is the normal balance of the account discount on bonds payable is it added to or subtracted from the bonds payable account to determine the carrying amount?
The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable. The premium or discount is to be amortized to interest expense over the life of the bonds. Hence, the balance in the premium or discount account is the unamortized balance.
Is discount on bonds payable an asset?
Although Discount on Bonds Payable has a debit balance, it is not an asset; it is a contra account, which is deducted from bonds payable on the balance sheet.
What type of account is premium on bonds payable and what is its normal balance?
A liability account with a credit balance associated with bonds payable that were issued at more than the face value or maturity value of the bonds. The premium on bonds payable is amortized to interest expense over the life of the bonds and results in a reduction of interest expense.
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.
Where does bond discount go on balance sheet?
The account Discount on Bonds Payable (or Bond Discount or Unamortized Bond Discount) is a contra liability account since it will have a debit balance. Discount on Bonds Payable will always appear on the balance sheet with the account Bonds Payable.
What are the differences between bonds payable issued at discount and bonds payable issued at premium?
When a bond is issued at a premium, the carrying value is higher than the face value of the bond. When a bond is issued at a discount, the carrying value is less than the face value of the bond. When a bond is issued at par, the carrying value is equal to the face value of the bond.
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.
What is the effect of bond amortization?
Amortization of debt affects two fundamental risks of bond investing. First, it greatly reduces the credit risk of the loan or bond because the principal of the loan is repaid over time, rather than all at once upon maturity, when the risk of default is the greatest.
What is the impact of amortization of bond premium each period?
If the interest paid on the bond is taxable, the premium paid on the bond can be amortized, or in other words, a part of the premium can be utilized towards reducing the amount of taxable income. Also, it leads to the reduction of the cost basis of the taxable bond for premium amortized in each period.