How does a company account for the difference between interest expense and the cash payment of interest when bonds are issued at less than their face value?

Question

Quizplus · Accepted Answer

When bonds are issued at less than face value, it means that the investors are paying less than the face value of the bond because the stated interest rate is lower than the market rate. Therefore, the company needs to account for the difference between the face value and the amount received as a discount on the bond. The discount is amortized over the life of the bond using the Amortization of Bond Discount method, which reduces the interest expense over time. As a result, the interest expense will be less than the cash payment of interest. Therefore, A is the correct answer.

How Does a Company Account for the Difference Between Interest