Q12RQ - Horngren'S Financial And Managerial Accounting

Question

What type of account is Discount on Bonds Payable? What is its average balance? Is it added to or subtracted from the Bonds Payable charge to determine the carrying amount?

Step-by-Step Solution

Answer

Discount on bonds payable is contra liability account. The difference between the face value and the selling price of the bonds is known as the discount on bonds payable. It is added to bonds payable.

Step 1: Definition of carrying amount

The carrying amount refers the value at which bonds are shown in books of accounts.

Step 2: Discount on bonds payable

Discount on bonds payable is a contra liability account. Discount on payable is added to the bonds payable to determine the carrying amount of bonds to bring the carrying value of bond equal to par value. The discount amortize periodically added to the bonds payable balance.