Accounting Treatment of Zero Coupon Bonds

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Is an interest expense still recorded for zero coupon bonds to reflect the amortization of the discount each year? I understand that the firm records the proceeds received at issuance as a liability. I’m uncertain what goes on from there. Any help would be much appreciated. Thanks.
 
Yes, the interest expense is still recored on the Income Stmt based on YTM of the bond at issuance.
 
And IE ammortizes the deep discount (a deep built in loss given that you receive a deep discount from the face value, yet you have to return the face value at maturity), the deep discount being registered as a counter account of the Bond Liability (Bond discount goes down with each IE “payment”).
 
If you issue a $1000 par value 10 year zero when interest rates are 5% you will receive $610.27 (based on semi-annual compounding). So at initiation (say Jan 1)
DR Cash 610.27
DR Disc. on BP 389.73
CR Bonds Payable 1000
06/01:
DR Interest Expense 15.26
CR Disc. on BP 15.26
12/31:
DR Interest Expense 15.63
CR Disc. on BP 15.63
No cash is paid and the book value of the bond at year end is $641.16.
Even if you are not making periodic interest payments, you are still incurring an expense to borrow the money as time passes.
 
Thanks Whodey - How would one classify the Discount on BP? Would that act like a contra account to the liability (bonds payable)?
 
Correct, it would be a contra liability and the bond’s book value would be the net.
 
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