1) Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
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2) Under what conditions of bond issuance does a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?
Companies often determine terms of a bond indenture long before the bond is offered. Often there are also changes in the financial position of the company or economy. These changes can alter the selling prices of the bonds. The stated rate is the price that the bond sells at whereas the face value is the proposed price of the bond based on previous metrics. Essentially, if the bond sells for more than face value, it is said to sell at a premium. In contrast, if the bond sells for less than face value, a discount on bonds payable will arise.
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