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Discount On Bonds Payable Formula:
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Discount on bonds payable represents the difference between the face value of a bond and its issue price when the bond is sold for less than its face value. This discount occurs when the bond's coupon rate is lower than the prevailing market interest rate.
The calculator uses the discount on bonds payable formula:
Where:
Explanation: The discount represents the amount by which the bond is issued below its face value, which will be amortized over the bond's life as interest expense.
Details: Calculating the discount on bonds payable is essential for proper accounting treatment, determining the effective interest rate, and understanding the true cost of borrowing for the issuer.
Tips: Enter the bond's face value and issue price in currency units. Both values must be positive numbers. The issue price should be less than the face value to result in a discount.
Q1: What causes bonds to be issued at a discount?
A: Bonds are issued at a discount when the coupon rate is lower than the market interest rate, making the bond less attractive to investors.
Q2: How is bond discount amortized?
A: Bond discount is amortized over the bond's life using either the straight-line method or effective interest method, increasing interest expense each period.
Q3: What's the difference between discount and premium on bonds?
A: Discount occurs when issue price < face value; premium occurs when issue price > face value. Discount increases interest expense, premium decreases it.
Q4: Does bond discount affect the issuer's balance sheet?
A: Yes, bond discount is recorded as a contra liability account that reduces the carrying value of bonds payable on the balance sheet.
Q5: Can bond discount be negative?
A: No, bond discount is always a positive amount representing the difference between higher face value and lower issue price.