 In this presentation, we will take a look at multiple choice questions related to bonds, notes payable, and long-term liabilities. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources, such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. First question, a bond sells at a discount when, a, the contract rate is higher than the market rate, b, the contract rate is equal to the market rate, c, the contract rate is lower than the market rate, d, it is a normal bond, e, the bond is issued right away. So we'll go through the process of elimination now. A bond sells at a discount when, either, a, and notice a through c are going to be very much the same here. So a says the contract rate is higher than the market rate, b, the contract rate is equal to the market rate, or c, the contract rate is lower than the market rate. That pretty much tells us it's probably one of those three, which means we can kind of eliminate d and e based on that because it's most likely one of those three if they're all the same except for one word being different. So d says it is a normal bond, and there might be such a thing as a normal bond but we don't usually say normal bond is not really a term we're using most of the time. So I'm going to cross that out. e says the bond is issued right away. And that might have some implications but it's not a direct cause, I mean it doesn't mean something has to be the case if something is issued right away. So we're left with a, b, and c, let's go through this again. A bond sells at a discount when, either, a, the contract rate is higher than the market rate, b, the contract rate is equal to the market rate, or c, the contract rate is lower. Now if it were equal, we wouldn't have a discount or premium. So it really goes down to is it higher or lower? That's really what it comes down to those two and we got to pick between those two. And I would always think about the actual bond here to think through this to not get to try to not get mixed up and go backwards. So if we had a bond say that was a 5% bond then that means we're issuing the bond. We're going to get $1,000 for it or that's what we're trying to get for it. And we're going to pay 5% on it. If the market rate happens to be 6% out there, meaning someone else could get their $1,000 and get 6% return on it, they're going to get more interest payment to invest somewhere else, then they're going to go somewhere else unless we say, hey, we'll pay you our 5% and we know that's less so we'll accept less money, meaning you give us something under $1,000. And so that would be a discount. Whereas if the market rate was 4% and our rate is 5%, then the investor would be more than willing to give us $1,000 because they couldn't get anything better anywhere else. But we would say no, we're not going to accept $1,000 because we know we're paying more on this bond than the market rate and therefore we're going to issue it at a premium. So that means that in this case, we're looking for something that sells at a discount. When are we going to sell it at a discount? We're going to sell it at a discount when our rate on the bond, the contract rate, the stated rate on the bond, is less than the market rate because we know they can go somewhere else and get more interest and therefore they're never going to buy our bond unless we sell it at a discount. So that's going to be C. So the normal contract rate is lower than the market rate. So once again, a bond sells at a discount when C, the contract rate is lower than the market rate. And anytime you deal with bonds and bond questions and whatnot, you have to get this relationship because it's almost a guarantee that a question like this will be on the tester in some form or another. Next question. The bond discount is A, an asset, B, a contra liability, C, an expense, D, a contra expense, or E, a contra asset. So if we go through this again, then the bond discount account is either A, an asset. Now the discount account, remember what happens is when we get a discount is we're getting cash because we're selling the bond if we think about the journal entry. And then we're going to have a payable at the end here, so that's going to be the credit of a thousand on the bond payable. Now if we sold it at a discount, the cash that we're going to get something less than a thousand, let's just say nine hundred or so, and then the hundred is going to be what that discount is. It's going to be another debit of, and that's going to be the discount. So the discount then is going to be part of the bond payable. It's how we get to the carrying amount of the bond payable. So these two are related, they're typically going to be kind of next to each other. And we know that the bond payable is a liability account. So the discount is typically in the liability section. But notice it's going the wrong way. This is a credit balance, this is a credit balance account and the discount typically has a debit. So let's look through these and given that. So an asset, it's not usually an asset because it's going to be something related to a liability account, related to the bond account, which is something we owe because we got cash and we owe it back. So it's not really an asset. A contra liability, that sounds kind of reasonable. So it's some type of liability, you would think. And then C says an expense. Now you might think an expense because, you know, we're going to expense it over time to interest expense. But the bond payable isn't an expense, it's just that we're going to amortize it to an expense over time. So it's not C and D says a contra expense. And again, it's not a contra expense because it's not an expense at all. We're going to write it off to an expense, but it's not an expense. And then E says a contra asset. And again, that doesn't really make sense either because it's not an asset at all. It's going to be a liability. So we're kind of just left with B, which is a contra liability. So what does it mean to be contra? It just means that the bond payable is going to be on the books as a liability of the 1,000. And that's going to be a credit. You can represent it with brackets. And then the discount is going to be still a liability, but it's going to be a debit, non-bracketed. So that means that the carrying amount is going to be the difference between the two. So it's still a liability, but it's going the opposite direction. It's most liabilities. So if these liabilities have credit balances, the discount has a debit balance. So a final answer, the bond discount account is B, a contra liability.