Since a bond’s discount is caused by the difference between a bond’s stated interest rate and the market interest rate, the journal entry for amortizing the discount will involve the account Interest Expense.
How do you amortize a discount bond?
Under the straight-line method, bond discount amortized in each period will equal total bond discount divided by total number of periods. In this case, it works out to $7,370 (=$147,409/20). Where BD is the total bond discount, n is the bond life in year and m is the total coupon periods per year.
What is amortization of bond discount?
Amortization is a process carried out to reduce the cost base of a bond for each period to reflect the economic reality of the bonds approaching maturity. The amortization is done at par. It is easy to prepare, and it is essential in calculating tax returns.
How would the balance of the discount on bonds payable account usually be reported in the balance sheet?
The balance in the discount on bonds payable account would usually be reported on the balance sheet in the: Current assets section.
How do you find the discount amortization?
The amortization of discount/premium and transaction cost are determined as the difference between interest income/expense and interest receipt/payment. Period-end carrying amount of a financial asset/liability is determined by adding/subtracting discount/premium amortized during a period to opening carrying amount.
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. The easiest way to account for an amortized bond is to use the straight-line method of amortization.
Why do you amortize bond discount?
A bond discount occurs when an issuer sells a bond and receives proceeds from investors for less than the face value of the bond. By amortizing a bond discount, the amount of amortization for each period can be used to determine periodic interest expense, as well as the changing bond carrying value over time.
How do you do straight line amortization?
The straight line amortization formula is computed by dividing the total interest amount by the number of periods in the debt’s life. This amount will be recorded as an expense each year on the income statement.
What is the purpose of amortization?
Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time.
How do you amortize a bond discount straight line?
The discount of $3,851 is treated as an additional interest expense over the life of the bonds. When the same amount of bond discount is recorded each year, it is referred to as straight-line amortization. In this example, the straight-line amortization would be $770.20 ($3,851 divided by the 5-year life of the bond).
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.
Where is bonds payable on the balance sheet?
What is Bonds Payable? Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. This account typically appears within the long-term liabilities section of the balance sheet, since bonds typically mature in more than one year.
What is the normal balance of discount on bonds payable?
Discount on bonds payable is a contra liability account, because it is contrary to the normal credit balance. Its normal balance is Debit balance. Discount on bonds payable account is added to determine the carrying amount. 13.
How do you find the discount on a bonds payable?
It is the sum of the present value of the principal plus the present value of the interest payments. Calculate the bond discount. Compare the bond’s market price which you just calculated with the bond’s face value. In the example above, the bond’s market price is lower than the face value.