On January 1 2016 2000000 5year 10 bonds were issued for 19

. On January 1, 2016, $2,000,000, 5-year, 10% bonds, were issued for $1,940,000. Interest is paid

      semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to

      amortize discount on bonds payable, the semiannual amortization amount is:

Solution

The account Discount on Bonds Payable (or Bond Discount or Unamortized Bond Discount) is a contra liability account since it will have a debit balance. Discount on Bonds Payable will always appear on the balance sheet with the account Bonds Payable. In other words, if the bond is a long-term liability, both Bonds Payable and Discount on Bonds Payable will be reported on the balance sheet as long-term liabilities. The combination or net of these two accounts is known as the book value or the carrying value of the bonds. On January 1, 2016 the book value of this bond is $ 1,940,000 the $2,000,000 credit balance in Bonds Payable minus the debit balance of $60,000 in Discount on Bonds Payable.

In our question, the bond discount of $60,000 results from the corporation receiving only $1940,000 from investors, but having to pay the investors $2,000,000 on the date that the bond matures. The discount of $60,000 is treated as an additional interest expense over the life of the bonds. When the same amount of bond discount is recorded each year, it is referred to as straight-line amortization. In this example, the straight-line amortization would be $12,000 ($60,000 divided by the 5-year life of the bond). For semiannually amortization $12,000/2 = $6,000/-.