FAR MCQ from Becker

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  • #1637858 Reply
    ab29
    Participant

    I have the answer to the following 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)

     
    “becker-cpa-review”/
     

    #1637920 Reply
    Ana
    Participant

    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.

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    #1637948 Reply
    Emmy
    Participant

    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.)

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    #3315021 Reply
    mt_cat
    Participant

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

    #3315024 Reply
    mt_cat
    Participant

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

    #3315030 Reply
    mt_cat
    Participant

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

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