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.
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:
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: