What Type Of Account Is Discount On Bonds Payable?

Bonds are debt instruments that a company offers for sale with an eye toward capital raising to support its activities; when a company issues bonds, it is said to have borrowed money from the investors. The company promises to pay back the bond amount at a specified future (maturity date) and make consistent coupon-based interest payments.

Sometimes the bonds can be sold for less than the par value. Usually referred to as bonds issued at a discount, more precisely as discount bonds, The bond discount is the difference between the bond's actual price at issuance and its face value, lessened from this by the investors. Knowing which account type discount on bonds payable refers to helps one for accounting purposes.

Define Bond Discount.

Bond discount is the difference between the real price of bonds issued and face value or par value on main markets.

For example, a company floated 1000 bonds with a face value of $10,000 each for five years at a reduced issue price of $9000 instead of the face value of $10,000 per bond, therefore generating $1000 worth of total bond discount.

The discount results from the discrepancy between the coupon rate the company promised to pay on the bond and actual market interest rates - the rate investors demand depending on the creditworthiness of the particular company and the state of the economy. This implies that the price shown on the bond and future return could be less than what investors are ready to pay.

Discount Account on Bonds

Discount on Bonds Payable is the contra account used to record the discount value when bonds payable are issued at a discount.

Although contra Accounts Payable show regular credit balances and hence show on the balance sheet as a withdrawal from the associated account. Discount on Bonds Payable has a credit balance here, thereby negating or reducing the Bonds Payable, with a $300,000 face value.

You would find something like on the balance sheet: On the balance sheet, you would see something like:

Bonds Paid for $10,000.
Less: The second offers a $1,000 bond payable discount.
Bonds Payable: Net $9,000

Though the face value of these bonds is $10,000, as we can see below when the corporation issued the bonds they obtained only $9,000. The $1000 discount account catches that variation.

The discount must be progressively taken to the income statement over time as the bonds approach maturity to be recorded as interest expense, sometimes known as amortization. The yield investors got to accept the bond offer at a lower price represents this interest cost. Higher interest paid to the bondholder is exchanged for an offsetting credit for the discount account throughout bond life until the principal is paid back, so fully credited.

In essence, Cash received from bond issue indicates actual cash acquired on bonds; Discount on Bonds Payable is a contra account in the liability section that helps to lower the Bonds Payable number by the issue price below the face value. This is a fundamental accounting technique required to explain this discount and distribute the impact over the interest expense line in balance sheets for the correct presentation of a company's bond liabilities and financing expenses.