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.
How will the amortization of discount on bonds payable affect bond interest expense?
When using the effective interest method, the debit amount in the discount on bonds payable is moved to the interest account. Therefore, the amortization causes interest expense in each accounting period to be higher than the amount of interest paid during each year of the bond’s life.
What happens to interest expense When a bond is issued at a discount?
If a bond is issued at a premium or at a discount, the amount will be amortized over the years through to its maturity. On issuance, a premium bond will create a “premium on bonds payable” balance. At every coupon payment, interest expense will be incurred on the bond.
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.
Does a discount reduce the interest expense of a bond over its life?
True, the discount is amortized to interest expense over the life of the bond, the discount is actually additional interest expense that has to be paid because the bond’s contract rate was less than the market rate on the bond issue date.
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 does amortization of premium on bonds payable?
The amortization of the premium on bonds payable is the systematic movement of the amount of premium received when the corporation issued the bonds. … Over the life of the bonds the premium amount will be systematically moved to the income statement as a reduction of Bond Interest Expense.
When bonds are issued at a discount?
Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond. To understand this concept, remember that a bond sold at par has a coupon rate equal to the market interest rate.
When bonds are issued at a discount the carrying value and the corresponding interest expense increase over time?
When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest expense increase over time. Interest expense on bonds payable is calculated as the: Carrying value times the market interest rate. A bond issue with a face amount of $500,000 bears interest at the rate of 7%.
Why are bonds issued at a premium or discount?
So, when interest rates fall, bond prices rise as investors rush to buy older higher-yielding bonds and as a result, those bonds can sell at a premium. Conversely, as interest rates rise, new bonds coming on the market are issued at the new, higher rates pushing those bond yields up. … So, those bonds sell at a discount.
What will the use of the effective interest method in amortizing bond premiums and discounts result in?
held-to-maturity debt securities. … available-for-sale debt securities. Use of the effective-interest method in amortizing bond premiums and discounts results in. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.
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.
Why do you amortize bonds?
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.
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 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.
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.