Thus, if the discount is amortized, the discount on bonds payable decreases. To get the carrying amount of the bonds, deduct the unamortized portion of the discount to the face value of the bonds. … On the other hand, as the carrying amount of the bonds increases, interest expense recorded also increases.
How would the amortization of discount on bonds payable affect the carrying amount of bond and net income respectively?
Answer A is correct because the credit to the discount account increases the carrying value of the bond, and the debit to interest expense will decrease net income.
How does amortization of discount affect the nominal interest and the carrying value of the bond?
When a discounted bond is sold, the amount of the bond’s discount must be amortized to interest expense over the life of the bond. … Therefore, the amortization causes interest expense in each accounting period to be higher than the amount of interest paid during each year of the bond’s life.
What is the amortization of discount on bonds payable?
The amortization of bonds is a process where the premium or discounted amount is assigned to the payment of interest of each period of the validity of the bond. The bonds can issue a discount or premium at par when the interest rate of the market is either higher or lower than the bond’s coupon rate.
How will net income or loss be affected by the amortization of a premium on bonds payable?
As the balance in the premium on bonds payable account declines over time, this means that the net amount of the bonds payable account and premium on bonds payable account presented in the balance sheet will gradually decrease, until it is $10,000,000 as of the date when the bonds are to be repaid to investors.
What is the initial measurement of bonds payable?
INITIAL MEASUREMENT OF BONDS PAYABLEIn accordance with PFRS 9, bonds payable not designated at fair value through profit or loss shall be measured initially at fair value minus transaction costs that are directly attributable to the issue of the bonds payable.
What is the treatment of bond issue cost under the effective interest method?
Chapter 7. FINANCIAL INSTRUMENTS
The amortization of bond issue costs is recognized by debiting interest expense and crediting bond issue cost. Under the effective interest method of amortization, the bond issue cost should be aggregated to the discount on bonds payable and netted against the premium on bonds payable.
What is the effective rate on bonds?
A bond’s effective interest rate is the rate that will discount the bond’s future interest payments and its maturity value to the bond’s current selling price (current market price or present value). The effective interest rate is a bond investor’s yield-to-maturity. It is also referred to as the market interest rate.
What are the two methods of amortization of bonds discount premium?
Effective-interest and straight-line amortization are the two options for amortizing bond premiums or discounts.
How do you Journalize discounts on bonds payable?
The journal entry to record this transaction is to debit cash for $87,590 and debit discount on bonds payable for $12,410. The credit is to bonds payable for $100,000 ($87,590 + $12,410).
Is discount on bonds payable an asset?
If the contractual interest rate is less than the market rate, bonds sell at a discount or at a price less than 100% of face value. Although Discount on Bonds Payable has a debit balance, it is not an asset; it is a contra account, which is deducted from bonds payable on the balance sheet.
What is the normal balance of discount on bonds payable?
The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable. The premium or discount is to be amortized to interest expense over the life of the bonds. Hence, the balance in the premium or discount account is the unamortized balance.
What is the discount amortization?
The discount amount is either a specific dollar amount or a percentage that will be taken off of an item. This value displays in the Discount box on the Sales Invoice window. … A sale discount always overrides all price and discount levels.
How do you record bonds payable?
To record bonds issued at face value plus accrued interest. This entry records the $5,000 received for the accrued interest as a debit to Cash and a credit to Bond Interest Payable. To record bond interest payment. This entry records $1,000 interest expense on the $100,000 of bonds that were outstanding for one month.