Question

When does a discount on bonds payable occur? When does a premium on bonds payable occur? Provide an example of the one you choose. Answer must be at least 150 words.

Answer 1

Solution:

Discount on bond payable occur when bonds are issued at amount lesser than face value. For example a $100,000 face value of bond was issued at $90,000. In this example, face value of bond is $100,000 and same was issued at cash price of $90,000. Thus discount on bond payable occur for a value of $10,000. Further discount on bond payable occurs when market rate of interest is higher than stated rate of interest on bond. The entry to record bond issue is "Debit cash, Debit Discount on bond payable; Credit bond payable"

Premium on bond payable occur when bonds are issued at amount greater than face value. For example a $100,000 face value of bond was issued at $100,000. In this example, face value of bond is $100,000 and same was issued at cash price of $110,000. Thus Premium on bond payable occur for a value of $10,000. Further Premium on bond payable occurs when market rate of interest is lesser than stated rate of interest on bond.The entry to record bond issue is "Debit cash, Credit Premium on bond payable; Credit bond payable"