Discount on Bonds PayableDefined with Example & More

Written By:
Lisa Borga

What is a Discount on Bonds Payable?

A discount on bonds payable, also known as a bond discount, happens when a bond’s par value is greater than its carrying value or issuing price.

A bond discount is the difference between these two figures.

The reason a discount on bond payable occurs is the stated rate of interest is below the market rate of interest.

When a company receives an amount for a bond that is different than the maturity amount or face amount of the bond, it will be recorded in a company’s general Ledger in a contra liability account called Discount on Bonds Payable.

Then, the company will amortize the amount of the difference to the account Bond Interest Expense throughout the bond’s life.

Example of a Bond Discount

For an example of a bond discount, suppose that a company is preparing to issue some bonds that, at maturity, will be worth $20,000,000.

The declared interest rate of these bonds would be 5% for a year.

But, when the company sold the bonds to some investors, there was a market interest rate of 5.2%.

This means the bonds would have been paying any investors below the current market rate of interest.

The bonds would have been paying $500,000 semi annually rather than the $520,000 they would receive with the current market interest rate of 5.2%.

Therefore, the investors purchased the bonds for less than $20,000,000.

Suppose some investors purchase these bonds that will be worth $20,000,000 at maturity for $19,600,000.

This means there would be a difference of $400,000 between the amount these investors paid for the bond and what they will be worth at maturity.

The corporation that issues the bonds will record the $400,000 difference by debiting the account Discount on Bonds Payable and also debiting cash for $19,600,000 and crediting Bonds Payable in the amount of $20,000,000.

The balance recorded in the account Discount on Bonds Payable becomes lower over the life of the bond as the amount is amortized to the account Bond Interest Expense.

The book value or carrying value of Bonds Payable is equal to the unamortized debit balance in the account Bond Issue Costs, the unamortized debit balance in Discount On Bonds Payable, and the $20,000,000 credit balance in the account Bonds Payable combined.