Question

What kind of account is the Discount on Bonds Payable? What kind of account is the Premium on Bonds Payable?

a) Both are contra liability accounts
b) Discount is a contra liability account; Premium is a liability account
c) Discount is a liability account; Premium is a contra liability account
d) Both are liability accounts

Answer 1

The Discount on Bonds Payable is a contra liability account, while the Premium on Bonds Payable is a liability account.

Step-by-step explanation:

The Discount on Bonds Payable is a contra liability account, while the Premium on Bonds Payable is a liability account.

A contra liability account is used to offset the balance of a related liability account. In the case of the Discount on Bonds Payable, it represents the amount by which the bond was issued at a lower price than its face value and is subtracted from the Bonds Payable account to show the lower net liability.

The Premium on Bonds Payable, on the other hand, represents the excess amount by which the bond was issued at a higher price than its face value and is added to the Bonds Payable account to show the higher net liability.