Question

Both discount on bonds payable and premium on bonds payable are:

1) adjunct accounts
2) contra accounts
3) nominal accounts
4) valuation accounts

Answer 1

Discounts on bonds payable and premiums on bonds payable are valuation accounts. They adjust the carrying amount of securities to face value over time.

Step-by-step explanation:

Both discount on bonds payable and premium on bonds payable are related to the issuance of bonds and are forms of valuation accounts. A discount on bonds payable occurs when a bond is sold for less than its face value, often because market interest rates are higher than the bond's coupon rate. Conversely, a premium on bonds payable happens when a bond is sold for more than its face value, as the market interest rates are lower than the bond's coupon rate.

Therefore, to answer the student's question, both discount on bonds payable and premium on bonds payable are valuation accounts (option 4). These accounts are used to adjust the carrying amount of the bond to its face value over time as the bond approaches maturity, bringing the bond's carrying value and the amount to be repaid in alignment.