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

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.

 Long Term Liabilities Bonds Payable, 6%, due December 31st, 2012 \$1,000,000 Less: Discount on bonds payable (\$52,740) Carrying value of bond (Dec 31st, 2009) \$947,260

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:

 6 interest payments of \$30,000 \$180,000 Par value at maturity \$1,000,000 Total repaid to bondholders \$1,180,000 Less: Amount borrowed from bondholders (\$947,260) Total bond interest expense \$232,740

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.

 6 interest payments of \$30,000 \$180,000 Add: Discount on bonds payable \$52,740 Total bond interest expense \$232,740

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:

 i) Allocating the total bond interest expense of \$232,740 across the 6 periods (3 years, semi-annual) ii) Updating the carrying value of the bonds at each balance sheet date