Discount on Bonds quiz #1 Flashcards
Discount on Bonds quiz #1
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What does it mean when a bond is issued at a discount, and why does this occur?
A bond is issued at a discount when its stated interest rate is lower than the market rate, causing it to sell for less than its face value. This occurs to attract buyers who can get a better return elsewhere. How is the issuance of a discounted bond recorded in the journal entries?
At issuance, cash is debited for the amount received, bonds payable is credited for the face value, and the difference is debited to 'discount on bonds payable,' a contra liability account. How is the discount on bonds payable amortized over the life of the bond using the straight-line method?
The total discount is divided evenly over the number of interest payment periods, and each period, a portion is credited to the discount on bonds payable and included in interest expense. How does the interest expense for a discounted bond differ from the cash interest paid?
Interest expense for a discounted bond is higher than the cash interest paid because it includes both the cash interest (based on the stated rate) and the amortized portion of the discount. What is the journal entry for an interest payment on a discounted bond using the straight-line method?
Interest expense is debited for the sum of the cash interest and the amortized discount, cash is credited for the cash interest paid, and discount on bonds payable is credited for the amortized amount. What happens to the discount on bonds payable account by the time the bond matures?
By maturity, the entire discount on bonds payable has been amortized to interest expense, so the account balance is zero. What is the journal entry when a discounted bond reaches maturity and is paid off?
At maturity, bonds payable is debited for the face value and cash is credited for the same amount, eliminating the liability. What is the main reason a bond is issued at a discount?
A bond is issued at a discount when its stated interest rate is lower than the market rate, making it less attractive to investors unless sold for less than its face value. How is the discount on bonds payable accounted for over the life of the bond using the straight-line method?
The total discount is divided evenly over the number of interest payment periods, and each period, a portion is credited to the discount on bonds payable and included in interest expense. What happens to the discount on bonds payable account by the time the bond matures?
By maturity, the entire discount on bonds payable has been amortized to interest expense, so the account balance is zero.
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