Intermediate Accounting II
In Intermediate Accounting II, when dealing with bonds and long-term notes, we have the contra liability account "discount on bonds payable". I know that it occurs when bonds are issued for less than their face or maturity amount. But what is it in layman's term? For instance, take the following example: On Jan. 1, 2016, Masterwear Industries issued $700,000 of 12% bonds, dated Jan. 1. Interest of $42,000 is payable semiannually on Jun. 30 and Dec. 31. The bonds mature in 3 years. The market yield for bonds of similar risk and maturity is 14%. The entire bond issue was purchased by United Intergroup, Inc.
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So in this scenario, at issuance, Masterwear, the bond issuer, would "receive" $666,633 in cash. They would also have a liability to pay back the full face amount of $700,000 in the future and this is the bonds payable account. I know that the discount of bonds payable is the difference of the bonds payable account and the cash account. So the discount of bonds payable would equal to $33,367. But in layman's term, what is that $33,367 and who gets it? I know it's not interest that will be expensed. Because at the first interest date (June 30), the account "interest expense" records the $46,664 of interest expensed and cash is credited for $42,000. And it's more confusing now. Because the "discount on bonds payable" is now $4,664. What is that $4,664? And who gets it or who owes it?
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Any insight at all would be truly helpful.
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Posted 09 May 2017 12:05 AM
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