Multiple Choice
A bond sells at a discount when the:
11. Long Term Liabilities
Discount on Bonds
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The discount on a bond payable becomes:
A
A liability on the balance sheet until maturity
B
A gain recognized immediately upon issuance
C
A reduction to interest expense each period
D
An additional interest expense over the life of the bond
Verified step by step guidance1
Understand the concept of a bond discount: A bond discount occurs when a bond is issued for less than its face value. This happens when the stated interest rate on the bond is lower than the market interest rate.
Recognize how the bond discount is treated in accounting: The discount is not recognized as a liability or gain immediately. Instead, it is amortized over the life of the bond using methods such as the straight-line method or the effective interest method.
Learn the impact of the bond discount on interest expense: The amortization of the bond discount increases the interest expense recorded each period, as it represents additional cost incurred by the issuer for borrowing funds below face value.
Understand the relationship between the bond discount and the carrying value of the bond: As the bond discount is amortized, the carrying value of the bond payable increases until it equals the bond's face value at maturity.
Conclude that the bond discount is treated as an additional interest expense over the life of the bond, aligning with the correct answer provided in the problem.
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