Final answer:
Companies must amortize the discount on a bond receivable when the bond is classified as held-to-maturity. The discount is amortized over the life of the bond, increasing the investment's carrying value on the balance sheet and recognizing interest income. The effective interest rate method is typically used for this amortization process. The correct option is C. When the company has classified the bond receivable as a held-to-maturity security.
Step-by-step explanation:
Companies are required to amortize away the discount on a bond receivable when they have classified the bond as a held-to-maturity security. This accounting method aligns with the concept that the discount represents an additional amount of interest income over the life of the bond. In essence, the discount is the difference between the bond's nominal value and the lower price at which it was issued.
When a company purchases a bond at a discount and classifies it as held-to-maturity, it intends to hold the bond until it matures rather than trading it. The amortization of the discount increases the investment's carrying value on the balance sheet over time and recognizes interest income in the income statement. This process is typically done using the effective interest rate method.
It is not true that companies never amortize discounts, and it's also not specific to when the company reports a balance in the discount account, nor is it only when the bond is classified as a trading security. In fact, trading securities are generally marked to market, and adjustments are made to fair value rather than through amortization. Only the held-to-maturity securities account sees the amortization of discounts on bonds, which helps to align the book value of the bond with its matured value over time.