Unamortized Bond Discount

An unamortized bond discount is the difference between the face value of a bond and its issue price. This discount is amortized over the life of the bond, and represents the cost of borrowing for the issuer.

The journal entry to record the issuance of a bond with a discount is:

Dr. Cash
Cr. Bonds Payable
Cr. Discount on Bonds Payable

The discount on bonds payable is a contra-asset account, which means that it reduces the carrying value of the bonds payable. The discount is amortized over the life of the bond, using the effective interest method.

The effective interest method is a method of amortizing a bond discount or premium that results in a constant rate of interest on the bond’s carrying value. The effective interest rate is the rate that equates the present value of the bond’s future cash flows to its issue price.

The journal entry to record the amortization of a bond discount is:

Dr. Interest Expense
Cr. Discount on Bonds Payable

The interest expense is calculated by multiplying the bond’s carrying value by the effective interest rate. The discount on bonds payable is reduced by the amount of the amortization.

The unamortized bond discount is the balance of the discount account that has not yet been amortized. The unamortized bond discount is reported on the balance sheet as a contra-asset account.

The unamortized bond discount reduces the carrying value of the bonds payable, which in turn reduces the amount of interest expense that is recognized each period. This can have a significant impact on the company’s financial statements.