Bonds Issued at a Discount

Concept

Why a Discount?

When the market demands a higher rate than the bond's stated rate, investors will only pay less than face value. The discount is the difference between face value and the issue price. It represents additional interest cost over the bond's life.

Example

Issuance Entry

A company issues $100,000 of 10-year, 6% bonds when the market rate is 8%. The bonds sell for $86,580. Entry: Debit Cash $86,580, Debit Discount on Bonds Payable $13,420, Credit Bonds Payable $100,000.

Key Point

Carrying Value

Carrying Value = Face Value − Unamortized Discount. As the discount is amortized, carrying value INCREASES toward face value over the life of the bond. At maturity, carrying value = face value.

Introduction to Bonds Payable

Bonds Issued at a Premium

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Practice questions from this module to reinforce what you learned.

Practice Questions