Chapter 2.7® - Balance Sheet Presentation of Bond Discount (Long Term Liabilities) & Amortizing a Bond Discount

• Part 2.1 - Issuing Bonds Payable & Long-Term Notes Payable, Advantages & Disadvantages of Bonds Payable, Par Value & Bond Certificates
• Part 2.2 - Example of Return on Equity & Raising Capital through Bonds & Shares and its Effects on Return on Equity - Issuance of Common Shares versus Bonds Payable
• Part 2.3 - Types of Bonds - Secured & Unsecured, Term & Serial bonds, Registered & Bearer bonds, Convertible & Callable bonds
• Part 2.4 - How Are Bonds Issue? How do you Trade Bonds? Bond Premiums & Discounts - Contract Rate versus Market Rates
• Part 2.5 - Issuing Bonds at Par (100% of Face Value) - Bonds Payable & Interest Expense Journal Entries, Issuing Bonds Between Interest Dates
• Part 2.6 - Pricing of Bonds - Present Value of a Bond Discount (Contract Rate is less than Effective Interest Rate) & Associated Journal Entries
• Part 2.7 - Balance Sheet Presentation of Bond Discount (Long Term Liabilities) & Amortizing a Bond Discount
• Part 2.8 - Straight Line Amortization Method of Bonds Payable & Bond Amortization Schedule versus Effective Interest Method of Bonds Amortization
• Part 2.9 - Pricing of Bonds - Present Value of a Bond Premium - Premium on Bonds Payable Journal Entry, Bond Premium Cash Flows & Repayment Upon Maturity
• Part 2.91 - Amortizing a Bond Premium Interest Expense – Straight Line Method & Effective Interest Method Example
• Part 2.92 - Accruing Bond Interest Expense - Journal Entry to Accrue Bond Interest Payable & Amortization of Bond Premium
• Part 2.93 - Retirement of Bonds at Maturity, Before Maturity and by Converting to Shares - Exercising a Bond Call Option, Book Market Value & Call Back Price
• Part 2.94 - Glossary of Bonds Payable Terms

The discounted amount is deducted from the par value of the bond to calculate the carrying or book value of the bonds payable. Discount on Bonds Payable is a contra liability account as it subtracts from its Control account, Bonds Payable. Here’s how the bonds payable from above is presented on the balance sheet.

Amortizing a Bond Discount

Since the company received $947,260 for its bonds and will pay the bondholders $1,000,000 face amount after 6 years plus interest payments totalling ($30,000 x 6 payments = $180,000). Because the $52,740 discount is eventually paid back to bondholders, it is a part of the cost of holding the bond and is included in calculating the amortization of the bond discount. Here is a bond amortization expense schedule:

Alternative Calculation

We can cut down on the number of calculations to arrive at the total bond interest expense by multiplying the periodic interest payment of $30,000 by 6 payments and adding the total to the discount on bonds payable.

Above is the bond amortization expense schedule graph showing the 6 interest payments of $30,000 each, the par value at maturity, the total amount repaid to bondholders less amount borrowed from them, and the total interest expense in a graphical format.

The accounting for this bond must include 2 steps: