Bond Discount on Issuance
Definition: Issue price below face value
Scope:NarrowDifficulty:Difficult
Issue price below face value
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Issue at discount | ||
| Issue $500,000 bonds for $485,000. | ||
| CashAsset+ | $485,000 | |
| Discount on Bonds PayableLiability− | $15,000 | |
| Bonds PayableLiability+ | $500,000 | |
| Market rate > coupon rate; investors pay less. | ||
| 2. Amortize discount (straight-line) | ||
| 10 periods: $15,000 / 10 = $1,500. | ||
| Interest ExpenseExpense+ | $16,500 | |
| Discount on Bonds PayableLiability+ | $1,500 | |
| CashAsset− | $15,000 | |
| Discount increases interest expense above coupon. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
CashAsset account. Debits increase the balance. Credits decrease the balance.AssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$485,000.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$15,000.00
$470,000.00
Discount on Bonds PayableDiscount on Bonds PayableLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$15,000.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$1,500.00
Normal bal. ▶
$13,500.00
Bonds PayableBonds PayableLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$500,000.00
Normal bal. ▶
$500,000.00
Interest ExpenseExpense account — cost of borrowing money. Debits increase the balance. Credits decrease the balance.ExpenseA cost incurred in the process of earning revenue. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$16,500.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$16,500.00
DurationLong-Term
External Links
- Bond (finance)#Bond discount — Wikipedia