Final answer:
The Discount on Bonds Payable account on a balance sheet is a subtraction from a long-term liability, representing the difference between the bond's face value and its lower selling price.
Step-by-step explanation:
The Discount on Bonds Payable account is shown on the balance sheet as a subtraction from a long-term liability. This account represents the difference between the face value of a bond and its selling price, when the bond is sold for less than its face value. The discount serves to increase the yield to the purchaser and is amortized to interest expense over the life of the bond, thus reflecting the effective interest rate over the time the bond is outstanding.
In regards to the format on the balance sheet, the Discount on Bonds Payable is a contra account to Bonds Payable and reduces the carrying amount of the bonds. A similar account, called Premium on Bonds Payable, would be used if bonds were sold for more than their face value and would be listed as an addition to the bonds payable on the balance sheet.