Multiple Choice
Which of the following statements is true of a bond that is issued at a discount?
11. Long Term Liabilities
Discount on Bonds
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
A discount on bonds should be reported in the balance sheet:
A
As a current liability
B
As a direct deduction from the face value of bonds payable
C
As a separate asset
D
As an addition to bonds payable
Verified step by step guidance1
Understand the concept of bond discounts: A bond discount occurs when bonds are issued for less than their face value. This happens when the stated interest rate on the bond is lower than the market interest rate.
Recognize how bond discounts are treated in financial accounting: Bond discounts are not considered liabilities or assets. Instead, they are treated as a contra account to bonds payable, reducing the carrying amount of the bonds on the balance sheet.
Learn the presentation method: In the balance sheet, the bond discount is reported as a direct deduction from the face value of bonds payable. This reflects the net carrying amount of the bonds, which is the face value minus the discount.
Understand why it is not reported as a current liability or separate asset: A bond discount does not represent an obligation (current liability) or a resource (asset). It is simply an adjustment to the value of the bonds payable account.
Review the accounting principle: This treatment aligns with the matching principle, ensuring that the expense related to the bond discount is amortized over the life of the bond, matching the interest expense with the periods in which the bond is outstanding.
9:29mWatch next
Master Issuing Bonds at a Discount with a bite sized video explanation from Brian
Start learningRelated Videos
Related Practice
Discount on Bonds practice set
Problem sets built by lead tutorsExpert video explanations