Question

What is the effect of the amortization of Discount on Bonds Payable on Interest Expense and the Bonds Payable account, respectively?

Answer 1

Answer:

The amortization of discount on bonds payable increases the interest expense and decreases the bonds payable balance. Discount on bonds payable is a contra liability account with a debit balance that decreases the credit balance of the bonds payable account.

Explanation:

E.g. $100,000 in bonds are issued, annual coupons with a 4% interest rate, matures in 5 years and sells for $90,000

the journal entry to record the issuance

Dr Cash 90,000

Dr Discount on bonds payable 10,000

    Cr Bonds payable 100,000

The journal entry to record first coupon payment using straight line method of amortization

Dr Interest expense 6,000

    Cr Cash 4,000

    Cr Discount on bonds payable 2,000

The bonds payable account balance after the first coupon payment = $92,000