The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable. The premium or discount is to be amortized to interest expense over the life of the bonds. Hence, the balance in the premium or discount account is the unamortized balance.

When bonds are issued at a premium?

A bond that’s trading at a premium means that its price is trading at a premium or higher than the face value of the bond. For example, a bond that was issued at a face value of $1,000 might trade at $1,050 or a $50 premium. Even though the bond has yet to reach maturity, it can trade in the secondary market.

Was the bond issued at a premium or a discount?

When a bond is first issued, it is a standard bond—never a premium bond or a discount bond. In other words, the price you pay for a new bond (its original price) is always fixed and is called the par value. A bond becomes “premium” or “discount” once it begins trading on the market.

What is bond issued at discount?

A bond issued at a discount has its market price below the face value, creating a capital appreciation upon maturity since the higher face value is paid when the bond matures. Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond.

Why is a bond issued at discount?

Under what situation might a bond discount arise when issuing bonds?

Discount on bonds payable occurs when a bond’s stated interest rate is less than the bond market’s interest rate. If a $1,000,000 bond issue promises to pay interest of 8% per year and the bond market demands 8.125%, the bonds will sell for less than $1,000,000.

When is a bond issued at premium or discount?

Bond Issued at Premium – If the market interest rate is less than that of the coupon rate, then the bond issues is at Premium Bond Issued at Discount – If the market interest rate is more than that of the coupon rate, then the bond issues is at a Discount Here we will take a basic example to understand bond accounting of par value bonds.

How does the bond premium exceed the face value?

The amount by which the bond proceeds exceed the face value of the bond is the bond premium. It equals $2.19 million. The bond premium causes the interest expense to be lower than the interest payment such that the effective rate of interest is lower than the coupon rate.

What is the carrying value of a bond?

A: The carrying value of a bond is the net amount between the bond’s face value and any un-amortized premiums or minus any amortized discounts. The carrying value is also commonly referred to as the carrying amount or the book value of the bond.

How is the unamortized discount on bonds payable amortized?

The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable. The premium or discount is to be amortized to interest expense over the life of the bonds.