How does a company account for the difference between interest expense and the cash payment of interest when bonds are issued at less than their face value?
A) The difference is accounted for using Amortization of Bond Discount.
B) The difference is accounted for using Amortization of Bond Premium.
C) In this situation the cash payment of interest will exceed interest expense.
D) The difference is accounted for using Bonds Payable.

Question

Quizplus · Accepted Answer

When bonds are issued at less than their face value, it means that the interest rate on the bond is higher than the prevailing market interest rate. This results in a discount on the bond, which is the difference between the face value of the bond and the amount paid by investors. This discount is considered an expense for the issuing company, and it needs to be amortized over the life of the bond. The amortization of bond discount reduces the interest expense over time until it matches the cash payment of interest. Therefore, the company accounts for the difference between interest expense and cash payment of interest using amortization of bond discount.

How Does a Company Account for the Difference Between Interest