[ab29]

I have the answer to the following Becker question. I was wondering if someone could explain to me why the discount on bonds payable is subtracted.

Gar, Inc.’s trial balance reflected the following liability account balances at December 31, year 1:
Accounts payable $19000
Bonds payable due year 2 34000
Deferred income tax liability 4000
Discount on bonds payable 2000
Dividends payable on 2/15/Y2 5000
Income tax payable 9000
Notes payable due 1/19/Y3 6000

The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes. In Gar’s December 31, year 1, balance sheet, the total current liabilities was:

answer: $65,000 (19+34-2+5+9)

 

 

[Ana]

Hi Ab, I'll give explaining it a shot. Hope it helps. Discount means that the bond will sell for less than the face value of the bond. The difference between the bond payable and the discount of the bond is the bond's carrying value at any particular point in time. For a bond with a premium the opposite would be true, add the premium to the face of the bond. If anyone disagrees please correct me.

[Emmy]

Ana is correct. Remember that a discount on bonds payable is a contra-liability, so it gets subtracted from the bonds payable liability. This is just like how the allowance for doubtful accounts is a contra-asset and gets subtracted from accounts receivable. (Note that a premium on bonds payable is a liability, so it is added to the bonds payable liability.)

[mt_cat]

could a bond discount lower long term liability or does it always lower current liability?

[mt_cat]

could a bond discount lower long term liability or does it always lower current liability?

[mt_cat]

figured out my question. yes bond discount can lower LT liability too.

[Author]

Replies