Question

Why does a bond discount have a higher interest interest expense than a bond premium

Answer 1

• When Bonds are issued at discount, Discount on Bonds Payable is debited at the time of Issuance.
• When Bonds are issued at Premium, Premium on Bonds Payable is Credited at the time of Issuance.
• This Discount or Premium recorded at the time of Issuance is to be amortised over the life of the Bond.
• Bond Discount have a higher Interest expense than a Bond Premium because:

--Bonds issued at discount have a higher market interest rate which is applied on the carrying value to calculate interest expense.

--Bonds issued at Premium have lower market interest rate which is applied on the carrying value to the carrying value.

--Cash Interest payment of Bonds issued at discount AND Amortised portion of Discount gets INCLUDED in the amount of Interest Expense.