Question

Which of the following statements correctly describes the accounting for bonds that were issued at a discount?

1) The discount is recorded as an expense in the income statement
2) The discount is recorded as a liability on the balance sheet
3) The discount is recorded as a contra account to the bond payable on the balance sheet
4) The discount is recorded as additional paid-in capital on the balance sheet

Answer 1

The correct way to account for bonds issued at a discount is to record the discount as a contra account to the bond payable on the balance sheet, which is amortized over the life of the bond.

Step-by-step explanation:

The correct description for the accounting of bonds issued at a discount is that the discount is recorded as a contra account to the bond payable on the balance sheet. When a bond is sold for less than its par value, the difference between the par value and the selling price is considered a discount. This discount is not treated as an expense immediately; rather, it is amortized over the life of the bond, effectively increasing the amount of interest expense recognized in each period. Therefore, the unamortized discount remains on the balance sheet as a contra liability, reducing the carrying amount of the bond payable until it is fully amortized.