How would amortization of discount on bonds payable affect the carrying amount of bond and net income respectively?
Answer A is correct because the credit to the discount account increases the carrying value of the bond, and the debit to interest expense will decrease net income.
How would the amortization of discount on bonds payable affect the carrying amount of bond?
Discount on bonds payable arises if the carrying amount of the bonds is lesser than its face value. Thus, if the discount is amortized, the discount on bonds payable decreases. … Therefore, the carrying amount increases as the discount are amortized.
How does Amortization of discount affect the nominal interest and the carrying value of the bond?
When a discounted bond is sold, the amount of the bond’s discount must be amortized to interest expense over the life of the bond. … Therefore, the amortization causes interest expense in each accounting period to be higher than the amount of interest paid during each year of the bond’s life.
What happens to discount on bonds payable and carrying value?
If the interest rate of the bond is lower than the current market rate, it sells at a discount. … The un-amortized portion of the bond’s discount or premium is either subtracted from or added to the bond’s face value to arrive at carrying value.
How will net income or loss be affected by the amortization of a premium on bonds payable?
As the balance in the premium on bonds payable account declines over time, this means that the net amount of the bonds payable account and premium on bonds payable account presented in the balance sheet will gradually decrease, until it is $10,000,000 as of the date when the bonds are to be repaid to investors.
What is the initial measurement of bonds payable?
INITIAL MEASUREMENT OF BONDS PAYABLEIn accordance with PFRS 9, bonds payable not designated at fair value through profit or loss shall be measured initially at fair value minus transaction costs that are directly attributable to the issue of the bonds payable.
How do you Journalize discounts on bonds payable?
The journal entry to record this transaction is to debit cash for $87,590 and debit discount on bonds payable for $12,410. The credit is to bonds payable for $100,000 ($87,590 + $12,410).
Is discount on bonds payable an asset?
If the contractual interest rate is less than the market rate, bonds sell at a discount or at a price less than 100% of face value. Although Discount on Bonds Payable has a debit balance, it is not an asset; it is a contra account, which is deducted from bonds payable on the balance sheet.
What is the normal balance of discount on bonds payable?
The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable. The premium or discount is to be amortized to interest expense over the life of the bonds. Hence, the balance in the premium or discount account is the unamortized balance.
What is the purpose of amortization?
First, amortization is used in the process of paying off debt through regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan—for example, a mortgage or a car loan—through installment payments.
What is the effective rate on bonds?
A bond’s effective interest rate is the rate that will discount the bond’s future interest payments and its maturity value to the bond’s current selling price (current market price or present value). The effective interest rate is a bond investor’s yield-to-maturity. It is also referred to as the market interest rate.
What is the effective interest rate of bond measured at amortized cost?
The effective interest rate is multiplied times the bond’s book value at the start of the accounting period to arrive at each period’s interest expense. The difference between Item 2 and Item 4 is the amount of amortization.