A discount on bonds payable:
A) Is not allowed in many states to protect creditors.
B) Increases the Bond Payable account.
C) Occurs when a company issues bonds with a contract rate more than the market rate.
D) Occurs when a company issues bonds with a contract rate less than the market rate.
E) Decreases the total bond interest expense.

Question

Quizplus · Accepted Answer

A discount on bonds payable occurs when a company issues bonds with a contract rate less than the market rate. This is because investors require a higher rate of return when interest rates in the market are higher. As a result, the bonds are sold at a discount, meaning the company receives less cash upfront than the face value of the bonds. The discount is then recorded as a contra-liability account, which increases over time and reduces the carrying value of the bonds payable. It also increases the total bond interest expense. Option A is incorrect because discounts on bonds payable are allowed in many states. Option B is incorrect because a discount on bonds payable decreases the carrying value of the bonds payable. Option C is incorrect because a bond issued with a contract rate more than the market rate would result in a premium, not a discount. Option E is incorrect because a discount on bonds payable actually increases the total bond interest expense.

A Discount on Bonds Payable