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 is discount payable?
Definition: A discount on notes payable occurs when the note’s face value is greater than its carrying value. The difference between the greater face value and the lesser carrying value is considered the discount. It represents the added interest that must be paid over the life of the note.
Is a discount on bonds payable an asset or liability?
§ 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. § The $98,000 represents the carrying amount of the bonds.
Do you credit or debit discount on bonds payable?
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.
When a bond is trading at a discount?
A bond will trade at a discount when it offers a coupon rate that is lower than prevailing interest rates. Since investors want a higher yield, they will pay less for a bond with a coupon rate lower than the prevailing rates—the upfront discount makes up for the lower coupon rate.