Hello, I have a question regarding discount bonds: When a firm sells bond at discount, it gets cash equal to PV of future payments. Assets and liabilities increase by this amount. Then, the liability increases as the discount is amortized to interest expense. Where does the total discount amount and the amortization (int. expense-coupon payment) appear on the balance sheet? Thanks!
DR Cash 900 DR Bond Discount 100 CR Bond Payable 1000 This is at issuance of the discount Bond . I believe Amortization expense appears similar to the depreciation expense on the Income statement. I hope this answers your question, minocfa. CP
minocfa Wrote: ------------------------------------------------------- > Hello, > > I have a question regarding discount bonds: > > When a firm sells bond at discount, it gets cash > equal to PV of future payments. Assets and > liabilities increase by this amount. > Then, the liability increases as the discount is > amortized to interest expense. > > Where does the total discount amount and the > amortization (int. expense-coupon payment) appear > on the balance sheet? > > Thanks! From what I understand(remember) you won’t find the total discount amount on the B/S. Each year the amount of liabilities just increase/decrease (depending on wehther the bond was sold at a premium or at a discount) by that certain amount x
Thank you for your answers. cpk123: I think “Bond Payable” should be 900 at issuance. Then, it increases to 1000 as amortization amount is added to it. On page 471 in FSA CFAI book, there is a comparison of financial statement effects of bonds issued at par, premium, and discount. The liability for a discount bond is initially equal to the discounted figure. (in your example:900). Then, it increases step by step as amortization (int. expense- coupon) is added to it until it reaches the par value (1000). My question is how this amortization gets into BS. What changes on assets side? HydrogenRainbow: When liabilities increase (discount bond), then what does change on the assets side? Thanks!
Minocfa I am pretty sure it is 1000 for Bond Payable. Because that is the Liability that you owe when you set up a discount bond. You have 2 debits 1 of 900 (cash) and 1 of 100 (Bond Discount) summing up to the liability of 1000. In the case of a Premium Bond DR Cash 1100 CR Bond Payable 1000 CR Bond Premium 100 That would be the accounting entry. CP
cpk’s answer is the correct “classic” way, where you have the liability account that has a credit balance, along with a debit contra account. While that level of detail may be recorded in a company’s general ledger, usually you only see the net figure on the balance sheet. When the discount is amortized and liability increases, interest expense is recorded. Since net income is ultimately closed out to retained earnings, what basically happens is that the liability increases and the effect of the expense (looked at on astandalone basis, apart from anything else that is going on related to income and expense) would be balanced by a shareholder’s equity decrease.
I see now what cpk123 meant…I am sorry, I could not understand it at the beginning. Thank you both for your explanations!