CFA Practice Question

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CFA Practice Question

In reference to the Discount on Bonds Payable and Premium on Bonds Payable accounts, which statement is true?
A. The Discount on Bonds Payable account is a contra asset.
B. The Discount on Bonds Payable account is amortized by a credit entry each period.
C. As the Premium on Bonds Payable account is amortized each period, the Interest Expense account is increased to the amount it would have been had the bonds been sold at par.

User Contributed Comments 6

User Comment
murli Not a contra because the Bonds are recorded at the actual proceeds of the issue (i.e.PV).
steved333 Discount is reduced from the bottom up. Premium is reduced from the top down. Bonds are liabilities, so that means discount gets credited, premiums debited. Still a little confusing sometimes for a banker (credit/debit are switched)
boddunah credit and debit are confusing
teje the bond is a liability, like murli mentioned above it is initially recorded on the books at PV. For discount bonds, this PV will be below par. The difference between par and pv is the amount that need to be amortized upwards for discount bonds. b/c at maturity the carrying value of the bond must equal the face value.

the bond discount amortization each period will be credited to the bond liability account, so as to increase this bond's carrying value, until it equals par at maturity.

as for the premium bond answer for part c, the interest expense is increased, as for the premium bond the cash coupon payment is greater than the interest expense. So for accounting purposes, we increase the interest expense so int. expense + prem. amort. = coupon payment.
teje however, answer c is wrong b/c of the last sentence, "had the bonds been issued at par" it would be right, if it said premium instead of par.

Remember at par there would be no need to increase or decrease interest expense to match coupon payment, b/c at pay, int. exp. = coupon pmt.
gill15 I should've never studied....just did a million questions....
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