Discount on bonds payable

Definition

Discount on bonds payable is the difference between a bond's face value and its lower issue price when sold below par. It represents additional interest expense to be amortized over the life of the bond.

5 Must Know Facts For Your Next Test

1. The discount on bonds payable occurs when bonds are issued for less than their face value.
2. This discount increases the effective interest rate for the bond issuer.
3. Amortization of the discount reduces the carrying amount of the bonds payable over time.
4. Two common methods to amortize this discount are the straight-line method and the effective interest method.
5. At maturity, the carrying amount of the bond will equal its face value.

Review Questions

Related terms

Premium on Bonds Payable:

Occurs when bonds are issued for more than their face value, reducing overall interest expense.

Effective Interest Rate Method: A method of amortizing bond premiums or discounts that results in a constant rate of interest over time.

Carrying Amount:

The net amount at which bonds are reported on the balance sheet, adjusted for any discounts or premiums.