Amortizing a bond discount: Multiple Choice Decreases

the Bonds Payable account.

Allocates a portion of the total discount to interest expense each interest period.

Increases the market value of the Bonds Payable.

Increases cash flows from the bond.

Decreases interest expense each period.

Allocates a portion of the total discount to interest expense each interest period.

Explanation:

First, we understand that once a bond is issued at a discount, the first implication is the existence of a debit figure representing the discount on the bond issued.

However, the treatment of this discount figure is this:

First, the difference between the interest based on the effective interest rate of the carrying value of the bond and the interest based on the coupon rate on the face value of the bond is calculated. Once calculated, the discount figure is then amortized to the value of the difference between the two interest figures.

As such, amortizing discount on bonds affects the interest expense each interest period.