The contra accounts cause a reduction in the amounts reported. What type of account is bond discount? Are bonds payable a current liability? Bonds payable that mature or come due within one year of the balance sheet date will be reported as a current liability if the issuer of the bonds must use a current asset or will create a current liability in order to pay the bondholders when the bonds mature.
Is a bond discount an asset? Breaking Down Unamortized Bond Discount The discount refers to the difference in the cost to purchase a bond it's market price and its par, or face value.
The issuing company can choose to expense the entire amount of the discount or can handle the discount as an asset to be amortized. What is Bond payable in accounting? Bonds payable are a form of long term debt usually issued by corporations, hospitals, and governments. What is the effective interest method? The effective interest method is a technique for calculating the actual interest rate in a period based on the amount of a financial instrument's book value at the beginning of the accounting period.
What is unearned sales revenue in accounting? The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Amortizable Bond Premium A tax term, the amortizable bond premium refers to the excess price the premium paid for a bond, over and above its face value.
What Is a Bond? A bond is a fixed-income investment that represents a loan made by an investor to a borrower, ususally corporate or governmental. Rate Trigger Definition Rate trigger is a drop in interest rates that compels a bond issuer to call their bonds, prior to maturity, in order to reissue at the lower rate.
What Is a Coupon Rate? A coupon rate is the yield paid by a fixed income security, which is the annual coupon payments divided by the bond's face or par value. Death Put Definition A death put is an option added to a bond that guarantees that the heirs of the deceased can sell it back to the issuer at par value. What Is an Unamortized Bond Discount? An unamortized bond discount is a difference between the par of a bond and the proceeds from the sale of the bond by the issuing company.
Partner Links. Related Articles. Fixed Income Essentials When is a bond's coupon rate and yield to maturity the same? Investopedia is part of the Dotdash publishing family.
Your Privacy Rights. This method divides the total premium by the number of interest payments to determine the reduction in interest expense to be recognized semiannually. The entry for the first interest payment would be as follows:. The carrying value will continue to decrease as the premium account's balance decreases. When the bond matures, the premium account's balance will be zero and the bond's carrying value will be the same as the bond's principal amount. The premium amortized for the last payment should be the balance in the premium on bonds payable account.
At maturity, the entry to record the principal repayment is:. The effective interest method of amortizing the premium calculates interest expense using the carrying value of the bonds and the market interest rate when the bonds were issued.
The entry to record the first interest payment on December 31 using the effective interest method of amortizing the premium would be:. As the premium is amortized, the balance in the premium account and the carrying value of the bond decreases. The amount of premium amortized for the last payment is equal to the balance in the premium on bonds payable account. As with the straight-line method of amortizing the premium, the effective interest method of amortizing the premium results in the premium account's balance being zero at the maturity of the bonds such that the carrying value of the bonds will be the same as the their principal amount.
See Table 4 for interest expense and carrying value calculations over the life of the bonds using the effective interest method of amortizing the premium. At maturity, the General Journal entry to record the principal repayment is shown in the entry that follows Table 4.
If a bond is sold at a time other than on its original issue date, the purchaser of the bond pays the issuing company the price of the bond plus accrued interest from the last interest payment date.
This accrued interest is paid back to the purchaser who receives six months of interest at the next semiannual interest payment date. For example, if Lighting Process, Inc. The entries for these two events would be:.
An adjunct account consists of entries that increase the book value of a liability account. Adjunct accounts are intended to provide additional detail to accounting figures and increase the overall transparency of financial reporting. An adjunct account may be contrasted to a contra account. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification.
For example, in a contra account, a discount on bonds payable account would result in a debit to a liability account. A contra account is used to reduce the value of a related account when the two are netted together.
Or, in simpler terms, a contra account offsets the balance of a corresponding account. It allows a company to report the original amount and also report a reduction so that the net amount will also be reported.
A contra account's natural balance is the opposite of the associated account, but they are reported on the same financial statement. If a debit is the natural balance recorded in the related account, the contra account records a credit.
A contra account is used in a general ledger. The net amount may also be referred to as the carrying amount or the net realizable amount. Since it is a contra asset account, the Allowance for Doubtful Accounts must have a credit balance. The balance in this account represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. If a company issues bonds, the Unamortized Premium on Bonds Payable account sometimes simply called Bond Premium account is an adjunct account because its credit balance is added to the amount in the Bonds Payable account in order to determine the book value of the bonds.
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