Multiple Choice
If bonds are issued at a discount, it means that the:
11. Long Term Liabilities
Discount on Bonds
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The Discount on Bonds Payable account is:
A
A liability account that increases the carrying value of bonds payable
B
A contra-liability account that reduces the carrying value of bonds payable
C
A revenue account that increases interest income
D
An asset account that increases the value of bonds payable
Verified step by step guidance1
Understand the concept of 'Discount on Bonds Payable': It represents the difference between the face value of the bond and its issuance price when the bond is issued at a price lower than its face value.
Recognize that 'Discount on Bonds Payable' is not a liability account that increases the carrying value of bonds payable. Instead, it reduces the carrying value of bonds payable because it reflects the amount by which the bond was issued below its face value.
Identify that 'Discount on Bonds Payable' is not a revenue account that increases interest income. Revenue accounts are related to earnings, not adjustments to liabilities.
Clarify that 'Discount on Bonds Payable' is not an asset account that increases the value of bonds payable. Assets represent resources owned by the company, whereas this account adjusts the liability side of the balance sheet.
Conclude that 'Discount on Bonds Payable' is a contra-liability account. Contra accounts are used to reduce the balance of a related account—in this case, the bonds payable account—on the balance sheet.
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