FA 41 - Bonds issued at a Discount

Summary

This educational video script delves into the intricate world of bonds, explaining their nature as a form of borrowing for companies and governments. It uses the example of MIT's century bond to illustrate long-term investment vehicles, highlighting the importance of interest rates, bond ratings, and the concept of issuing bonds at a discount or premium. The script guides viewers through the process of accounting for bonds, specifically focusing on the issuance of bonds at a discount, creating an amortization schedule, and recording journal entries for interest payments and adjustments.

Takeaways

• 📚 The video discusses problem 9.3a from a counting workbook, which involves understanding bonds and their accounting treatment.
• 💼 A bond is essentially a long-term debt instrument where a company or entity borrows money and issues a note payable, promising to pay it back with interest.
• 🏛️ The video uses the example of MIT issuing a 'century bond' to illustrate the concept of bonds, which are long-term investments with maturities spanning many years.
• 💡 The attractiveness of bonds to investors, especially the elderly, is highlighted due to the stable income they provide through regular interest payments.
• 🏦 Bonds are rated based on the creditworthiness of the issuer, with triple-A being the highest rating, indicating a very low risk of default.
• 📉 The market rate of interest can affect the price at which bonds are issued; if the bond rate is lower than the market rate, bonds are issued at a discount.
• 🔢 The video provides a detailed walkthrough of creating a bond amortization schedule, which is used to account for the interest expense and discount amortization over the life of the bond.
• 📝 The first journal entry for the issuance of a bond is explained, showing how the bond payable and the discount on the bond are recorded when the bond is issued at a discount.
• 📉 The concept of discount amortization is introduced, explaining how the initial discount on a bond is gradually recognized as interest expense over the bond's term.
• 📋 The video demonstrates how to calculate the interest expense and discount amortization for each semi-annual period, adjusting for the effective interest rate.
• 🔑 The final journal entries for the first interest payment and the fiscal year-end are provided, showing the recognition of interest expense and the payment or accrual of interest.

Q & A

What is the primary purpose of a bond from an accounting perspective?

From an accounting perspective, a bond is essentially a company borrowing money, which is recorded as a note payable. The company receives cash and issues a promise to pay back the amount with interest.

Why might a company or government issue bonds?

A company or government might issue bonds to borrow money when banks do not offer favorable rates or features. By issuing bonds, they can attract investors to lend them money in exchange for interest payments.

What is a distinguishing feature of bonds compared to other forms of debt?

Bonds are typically long-term in nature, with some bonds being extremely long-term, such as the MIT century bond which matures in 2116.

Why would an investor be interested in purchasing century bonds like the MIT bond?

Investors are interested in century bonds primarily for the regular interest payments they receive, rather than the return of principal, which they may not live to see. These bonds provide a stable income stream, such as annual or semi-annual payments.

What does the bond rating indicate about the bond?

The bond rating indicates the quality and risk associated with the bond. A higher rating, such as triple-A, suggests that investors are very confident in the issuer's ability to repay the bond, while lower ratings indicate higher risk.

How does the market interest rate affect the price at which a bond is issued?

If the market interest rate is higher than the bond rate, the bond will be issued at a discount, meaning investors will pay less than the face value to account for the lower return compared to other investments. Conversely, if the bond rate is higher, it may issue at a premium.

What is the significance of the bond discount in accounting?

The bond discount represents the difference between the amount the company received when issuing the bond and the amount it has promised to pay back. This discount is accounted for over the life of the bond, effectively increasing the interest expense recognized each period.

Can you explain the process of creating a bond amortization schedule?

A bond amortization schedule is created to track the bond's interest payments, interest expense, discount amortization, and the changing bond carrying amount over time. It includes columns for dates, interest payments, interest expense, discount amortization, and adjustments to the bond's carrying amount.

What is the effective interest method used for in bond accounting?

The effective interest method is used to allocate the bond's discount or premium over its life, ensuring that the interest expense is recognized proportionally with the passage of time, reflecting the effective interest rate of the investment.

How does the company account for interest payments and expenses during the fiscal year?

The company records interest expense based on the effective interest rate and the bond's carrying amount at the beginning of the period. It also adjusts for the discount amortization, which reduces the discount balance and increases the interest expense over time.

What is the journal entry for the issuance of a bond at a discount?

The journal entry for the issuance of a bond at a discount includes a debit to cash for the amount received, a credit to bond payable for the face value, and a credit to the discount on bonds for the difference between the cash received and the face value of the bond.

Outlines

00:00

📚 Introduction to Bonds and Video Workbook

The script begins by directing viewers to a website for a downloadable workbook containing the problems discussed in the video. It mentions that all problems, including those not listed on YouTube, are covered with either public or members-only videos. The speaker then introduces the first problem about bonds, explaining that bonds are a form of borrowing for companies, like a note payable, and are typically long-term. The example of MIT's century bond is used to illustrate the concept, highlighting its 500 million dollar issuance maturing in 2116 with an interest yield of 3.88%. The video promises to explain what bonds are and how they work before diving into the problem.

05:02

🏦 Understanding Bonds and Their Market Dynamics

This paragraph delves deeper into the nature of bonds, focusing on their long-term characteristics and using the MIT century bond as a case study. It explains the appeal of bonds to investors, particularly retirees, due to the steady income they provide. The script discusses the bond rating system, which assesses the risk of the bond issuer defaulting, with triple-A being the highest rating. The example of comparing MIT and Harvard bonds is used to illustrate how market rates and bond yields affect an investor's decision, with bonds being issued at a premium or discount based on their relative attractiveness compared to market rates.

10:04

📉 Bond Issuance at a Discount and Journal Entry

The speaker introduces a scenario where a company issues bonds at a discount due to a lower interest rate than the market rate. Using the example of 'ting erinc' issuing $100,000 in 10-year bonds with a 5% interest rate semi-annually, which is less than the market rate of 6%, the bonds are issued at 92.56% of their face value. The script explains the journal entry for the bond issuance, highlighting the initial cash received, the bond payable, and the discount on the bond, which represents additional interest to be paid over the bond's life.

15:07

📊 Constructing a Bond Amortization Schedule

The script outlines the process of creating a bond amortization schedule to account for the discount on bonds issued at a discount. It provides a detailed explanation of the columns in the schedule, including interest payment dates, interest expense, market rate, discount amortization, and changes in the bond's carrying amount. The example continues with 'ting erinc' bonds, showing the initial entries for the first interest payment and the corresponding adjustments to the discount and carrying amount.

20:08

✍️ Journal Entries for Interest Payments and Fiscal Year-end

This section describes the process of making journal entries for the first interest payment on the bonds and adjusting for the fiscal year-end. It explains how to use the data from the bond amortization schedule to record the interest expense, discount amortization, and cash payments. The script provides a step-by-step guide for calculating the interest expense and discount amortization for the period from August to September, including the adjustment for the partial period and the creation of an interest payable liability.

25:09

🔚 Final Journal Entries and Conclusion

The final paragraph wraps up the problem by addressing the journal entries for the second interest payment on February 1st and adjusting for the subsequent months up to the fiscal year-end. It explains how to calculate the interest expense and discount amortization for the full six-month period and the necessary adjustments for the cash payment and interest payable. The script concludes by summarizing the problem-solving process for bonds issued at a discount, highlighting the importance of understanding both the mechanics and the conceptual aspects of bond accounting.

Keywords

💡Bond

A bond, in the context of this video, represents a debt security issued by a company or government to raise funds. It involves borrowing money from investors with a promise to pay back the principal amount along with interest over a specified period. Bonds are central to the video's theme, as it discusses the issuance, characteristics, and accounting for bonds, particularly focusing on how they work and their associated risks and benefits.

💡Interest

Interest in this script refers to the payment that an investor receives for holding a bond. It is a form of income that the bond issuer promises to pay at a fixed rate, typically semi-annually, until the bond's maturity date. The concept of interest is integral to understanding bonds, as it is the primary motivation for investors to purchase bonds and is a significant factor in the bond's valuation.

💡Discount

In the script, 'discount' is used to describe a situation where a bond is issued at a price lower than its face value. This occurs when the bond's coupon rate is lower than the market interest rates, making the bond less attractive to investors. The discount is an important concept in the video, as it affects the bond's price, the amount the issuer receives, and the accounting treatment for the bond over its life.

💡Premium

A 'premium' in the context of bonds is the opposite of a discount; it is when a bond is issued at a price higher than its face value due to a coupon rate higher than the market interest rates. Although the term 'premium' is not the main focus of the video, it is contrasted with 'discount' to illustrate how market conditions can affect the price at which bonds are issued.

💡Market Rate

The 'market rate' mentioned in the script is the current interest rate for similar investments in the financial market. It is a benchmark that investors use to compare the returns of different bonds. The market rate is crucial in determining whether a bond will be issued at a discount or a premium and influences the bond's attractiveness to potential investors.

💡Maturity Date

The 'maturity date' is the date on which the bond issuer is obligated to repay the principal amount to the bondholder. It is a key term in the script, as it defines the timeline for the bond's repayment and is used to calculate the bond's interest payments and the period over which the discount or premium is amortized.

💡Amortization

Amortization, in the context of bonds, refers to the process of gradually writing off the discount or premium over the life of the bond through regular adjustments to the bond's carrying amount. The script explains how to create an amortization schedule and perform journal entries to account for the bond's interest expense and the amortization of the discount or premium.

💡Interest Expense

Interest expense is the cost recognized by the bond issuer for borrowing money through the bond. It is calculated based on the market interest rate and the bond's carrying amount. The script details how to calculate interest expense and record it in journal entries, which is essential for the accurate financial reporting of the bond's impact on the issuer's income statement.

💡Bond Payable

Bond payable is an accounting term for the liability that a company has to pay back to bondholders, including both the principal and any interest due. In the script, bond payable is used to describe the liability recognized by the company when it issues bonds and is adjusted over time through the amortization of the discount or premium.

💡Journal Entry

A 'journal entry' in the script represents the recording of financial transactions in the company's accounting system. The video explains how to create journal entries for the issuance of bonds, interest payments, and the amortization of discounts or premiums, which are essential for reflecting the bond's financial impact on the company's balance sheet and income statement.

💡Effective Interest Method

The 'effective interest method' is a technique used to allocate the discount or premium on bonds to each interest period. It ensures that the interest expense is recognized in a way that reflects the effective yield of the investment. The script provides an example of how to use this method to calculate interest expense and amortize the discount over the life of the bond.

Highlights

Introduction to the concept of bonds as a financial instrument and their complexity in accounting.

Explanation of bonds from the perspective of a company borrowing money and issuing notes payable.

Discussion on why large entities like governments and universities issue bonds to borrow money.

The illustration of how bonds work using the example of MIT's century bond.

Clarification on the long-term nature of bonds and the unique case of century bonds.

Description of the appeal of bonds to investors, especially retirees, for stable income.

Explanation of bond ratings and what they signify about the risk associated with different bonds.

Analysis of how investors choose between bonds based on interest rates and perceived safety.

The concept of bonds issuing at a premium or discount based on market rates and bond rates.

Detailed walkthrough of problem 9-3A involving Ting Erinc issuing bonds at a discount.

Journal entry explanation for the issuance of bonds and the accounting for the discount.

Creation of an effective interest table to account for the amortization of bond discounts.

Step-by-step calculation of interest payments, interest expenses, and discount amortization.

Journal entry examples for interest payments and adjusting entries for interest payable.

Discussion on the mechanics of recognizing interest expense over the life of a bond.

Final journal entries for the fiscal year-end adjustments related to bond accounting.

Summary of the process for accounting bonds issued at a discount and the importance of understanding the effective interest method.

Transcripts

the problem from this video can be

downloaded at a Counting workbook calm

if you go to the website click the PDF

link and you can download a copy of this

and all of my problems for yourself now

if you check the website and you click

on videos you'll see there are more

videos than those I've listed publicly

on YouTube you can see that there's

every problem covered in the workbook

has either a public video or a

members-only video if you'd like access

to the members only video just click the

join button beneath the video player on

YouTube alright let's jump into the

problem let's examine problem 9 3a this

is our first problem about a bond and

bonds are difficult and technical to

deal with so actually before I jump into

the problem I just want to explain what

bonds are and kind of how they work and

then we'll come back to the bond problem

if you feel like no I know what a bond

is just skip ahead I'll put the amount

of time you need to skip ahead up here

and for the rest of us let's just

discuss what are bonds so a bond and

pretty good when you're looking at it

from the perspective of an intro

accounting class a bond is a company

borrowing money and it's the company

getting a note payable so they get cash

and they write a piece of paper saying I

promise to pay you back with money now

this is big company accounting and so

typically and even big governments issue

bonds as well and city governments issue

bonds typically what they're doing is

they're saying I want to borrow money

the banks aren't giving me a rate or

features that I like so I just want to

have investors buy my bonds I want to

borrow money from just people and so

let's say I want to borrow 10 million

dollars it's hard to find somebody

outside of a bank to lend 10 million

dollars but what I could do is I could

find hundreds of people or even

thousands of people willing to lend me

$1,000 right and just a lot of little

notes payable and so what Aban is it's

just a package of notes payable now what

sort of distinguishes a bond they're

typically quite long-term in nature and

in fact they can be very very long-term

in nature and I just wanted to discuss

one bond and it's gonna help us kind of

illustrate what we're talking about when

we talk about one so I just googled this

mit century bond is what it's called if

you google you'll get the same story

there's a link there to the story says

MIT sells 500 million dollars in taxable

century bonds and let's just read this

first paragraph earlier today well this

was 2016 but earlier today and my tea

sold 500 million dollars of seriesi

taxable bonds maturing in 21 16 and

yielding 3.88 5% so MIT wanted to borrow

that's a lot of money five hundred

million dollars and presumably they

looked at all of their options and you

know maybe went to banks and banks don't

want to lend and look at the maturity

date 21 16 so what does that mean MIT is

gonna borrow five hundred million

dollars today and they're gonna pay it

back in 21 16 now I don't know about you

but I guess just about everybody

watching this video is going to be dead

in 20 160 I'm not gonna be dead because

I'm going to have my brain frozen in

some vat of liquid nitrogen and now I'm

gonna outlive everybody watching this

video but most of you guys are going to

be dead in 21 16 so let's think about

this proposition MIT says hey we want to

borrow 500 million dollars we're gonna

slice it up into thousand-dollar slices

so you invest $1,000 in MIT and in 2116

you get your thousand dollars back plus

interest well that wouldn't make any

sense because of course you're long

since dead before you can collect on

that money and that's a problem so

here's why this type of bond exists and

here's why people actually buy these

bonds they're not actually interested in

the money coming back in 2160 that's a

small part of it what you're interested

in is this number and MIT says okay

I'm gonna pay you let's just round this

up 4% interest just for the purpose of

our conversation so if you invest let's

say you're a retiree you've got a

million bucks

okay you've got a million dollars ready

to retire a million dollars and you say

I'm gonna buy these MIT bond so MIT pays

4% that's $40,000 per year now this is

actually a pretty stable way to have our

retirement if MIT exists as a university

they will pay you back and so you could

say okay I put away a million dollars

I'm gonna get $40,000 a year for the

rest of my life until the day I die and

then you know my offspring my kids are

gonna have this $40,000 annuity every

year they'll get $40,000 and in fact

bonds don't pay interest every year they

pay interest every six months so we

divide that by two and we would say

20,000 dollars each six months so the

people who like to buy bonds are

typically old people

right and MIT bonds are attractive

because people trust that MIT is going

to be around to pay them back

bonds get rated based on quality now MIT

would be the highest rating of bond

triple-a meaning investors are very

confident MIT is going to be able to pay

them back

countries like Canada is triple-a rated

and various other borrowing entities you

know will be rated triple-a double a

single a triple B BB single B I think it

even goes down to like C and D but you

really don't need the quarry when you

get down that low this is based on risk

so as you go higher your risk gets lower

so in other words this is risky this one

is safe and it's sort of a spectrum so

what an investor would do is they'd look

at these MIT bonds and they would say to

themselves okay let's just say I want to

invest my million dollars that I've got

set aside for my retirement and there's

a market

for these bonds I can buy in mighty

bonds that pay 4% well let's say it the

same and so MIT super-safe let's say at

the same time Harvard has a bond that

pays 5% same term same everything else

Harvard has a bond that pays 5% mit has

a bond that pays 4% well in my view

Harvard is just a safer bet as MIT is

now maybe some university expert will

tell me why I'm wrong but in my sort of

uninformed view I would think Harvard

and MIT are basically identical in terms

of their risk profile I think they're

both super solid institutions that

aren't going out of business any time

soon I would feel very comfortable to

lend them money that they would pay me

back so in this circumstance Harvard can

get me 5% MIT gives me 4% if you're an

investor there ain't an investor in the

world that wouldn't buy the harvard bond

over the MIT but you'd have to be a real

MIT superfan to invest in MIT if you

could get 5% from Harvard and a 4%

guaranteed return from Harvard versus a

4% or very low-risk return from Harvard

versus 4% very low risk return from MIT

so as a consequence Harvard bonds will

issue at a premium what does that mean

it means that Harvard bonds will sell

for more if I want to lend Harvard

$1,000 or have Harvard pay me back

$1,000 in 100 years or 20 years or

whatever the timeline is I actually have

to lend them more than a thousand

dollars so I pay more or lend more than

they pay back MIT on the other hand

let's just say the market rate for these

types of companies is like four and a

half percent so in my tea is below the

market rate Harvard is above MIT on the

other hand would he issue their bonds at

a discount in other words you could pay

less than a thousand lend them less than

a thousand dollars and be be paid back a

thousand dollars at the end of the term

so

this chapter is all about this scenario

accounting for this accounting for the

fact that companies borrow money they

borrow these complicated bonds and when

they borrow the money they sometimes get

more than they asked for for example if

our interest rate is high or they

sometimes get less than they asked for

if their interest rate is low so that's

what we're accounting for here and

that's what we're dealing with and I

think now would be a good time to jump

back into the problem if I can find the

problem where is the problem there this

G's took me a while okay

so let's now jump in to problem 9 3a on

February 1st 2024 ting erinc issues

$100,000 10-year 5% but okay so the bond

rate the rate we're promising to pay is

5% and again numbers are always annual

bonds though pay interest every six

months so our rate is 2.5% every six

months that's 5% divided by two

the market rate of interest is 6% okay

so again every six months that's 3%

semi-annually I guess I should say I

keep saying every six months but the

real word is semiannual the semi-annual

interest rate here is 6% so immediately

I bond this I'm offering 5% they can get

6% with other investments in the market

guess what nobody's gonna pay full price

for my bond

now when I say 6% for other investments

in the market I mean ones that are very

similar to my company so with a similar

risk profile to ting erinc

you can expect to get 6% tinks only

offering at 5% ting erinc is an

unattractive bond purchase and as a

consequence is going to have to issue at

a discount it's gonna have to take less

than it that was not if they if they

want to get $100,000 well too bad there

either have to offer a higher interest

rate or take less money and they're

gonna take less money here that's why

this

is a bond issued at a discount again the

market rate of interest is higher than

our rate nobody's gonna want to buy our

bond unless we sell it cheaper okay

because the market rate is higher than

the bond rate the bonds issue at a

discount

the bond code is ninety two point five

six one when you see a bond quote like

this ninety two point five six one just

think percentage so we got ninety two

point five six one percent of what we

asked for

so we'll actually let's do the math here

we asked for $100,000

we got ninety two point five six one

percent of that so we got ninety two

thousand five hundred and sixty one

dollars okay so we can actually do our

first journal entry and why don't we do

it we'll do this table in a minute let's

let's solve B journal entry I the

journal entry for the issuance of the

bond so again we're looking at B journal

entry I we issued this bond on February

first 2024 we asked for a hundred

thousand dollars we only got ninety two

thousand dollars so let's debit cash

ninety two 561 lets credit bond payable

I'm gonna leave room for another debit

here bond payable and at the end of this

after ten years I've got to pay back a

hundred thousand dollars now the

difference here is the discount or the

premium and in this case we got less

than we asked for we have a discount of

seventy four thirty nine that is the

discount on the bond payable okay so

we've done the first entry again I owe

$100,000 I only got ninety two thousand

dollars today so I'm taking a discount

of seventy four thirty nine a different

way to think of the discount is I borrow

- in ten years I got to pay back a

hundred this discount represents almost

like extra interest right I have to pay

seventy four thirty-nine I have to pay

interest every six months but I also

have to pay seventy four thirty-nine an

extra money over the you know at the end

of the life of the bond that's extra

interest and so well we'll deal with

that discount as the question goes on

okay so that was we did be part I says

the bonds pay interest semi-annually on

February first I'm just looking here I'm

February first in August first the

company's fiscal year into September

30th prepare the bond amortization

schedule okay so we get a discount

amortization schedule so there's a the

first column and you should have this in

your accounting workbook semiannual

interest period is just a date and so

the the first relevant date is Feb 1

2024 then it's just our interest dates

so our first interest payment August 1st

2024 and our second interest payment Feb

1 2015 the chart it's just bond issuance

date interest interest interest okay our

interest payment blank percentage

maturity value this is our rate divided

by two so our rate was 5% / - it's 2.5

percent this is actually a lot easier to

do in Excel but I'll do it by hand

because you might have to do it by hand

interest expense market rate again / -

because it's all semiannual on this

chart so it's 6 percent divided by 2 is

3 percent discount amortization or

premium amortization well it's a

discount not a premium so this scratch

that no discount premium account balance

again it's this

account account balance and bond

carrying a blank - t discount blank plus

at the premium and the blank here you

can see it's dollars something missing -

d the blank here is the face value of

the bond so in this case the face value

of our bond is a hundred thousand okay

we're ready to go so our interest

payment blank percent or two-and-a-half

percent of maturity value so I take will

actually forgive me we're doing February

first on the issuance of the bonds so

February 1st is the day ting erinc sort

of sells the bonds they say okay give us

money we'll give you pieces of paper

that say we promise to pay you back a

hundred thousand dollars you know it's a

hundred one thousand dollar notes

payable the different lenders right

different investors so Tigger does not

make an interest payment on day one

they're just borrowing the money so

nothing happening there there's no

interest expense on day one and there's

no discount amortization on day one

these three cells are always blank

they will never be used we do have a

discount account balance on day one

what's our discount on day one

it's seventy four thirty nine just what

we put in the journal entry we do have a

bond carrying amount a hundred thousand

- so it says 100 thousand minus D so a

hundred thousand - seventy four thirty

nine is ninety - 561 okay let's move on

to line two interest payment 2.5 percent

of maturity value our maturity value is

a hundred thousand that's the amount we

got to pay back at the end of the bond

so - oops let's do this way a hundred

thousand times point zero two five

twenty-five hundred dollars

interest expense three percent of the

preceding bond carrying amount three

percent now the preceding bond carrying

amount is right here ninety-two 561 so I

take three percent of that number point

O three times nine to five six

on 2777 we're just gonna round to the

dollar in this table again on a

spreadsheet it would take to the the

penny or beyond 2777 discount

amortization b minus a so whatever you

haven't Selby 2777 - sell a twenty five

hundred twenty seven seventy seven minus

twenty five hundred is 277 discount

account balance D minus C so 74 39 minus

277 again these two number 74 39 and 277

let's do it seven four three nine minus

two 771 62 and last $100,000 minus D a

hundred thousand minus 71-62

and I get 92 a 38 okay on to the next

one and once you've done this a couple

times it does get to be old hat I

recognize the first time you do this

it's really hard after you've done it

like three four times it actually gets

boring it gets easy but it's hard the

first few times for sure okay so let's

do column a again for February 1st 2025

interest payment blank percent of

maturity value two-and-a-half percent of

maturity value well it's still two and a

half percent our maturity value is

always what we pay back at the end it's

always a hundred thousand the face value

so two and a half percent of a hundred

thousand is twenty five hundred and if

we did this table you know for the full

ten years it would be twenty five

hundred every time that's why old people

like this investment it is like steady

Eddie right it's the same every period

in terms of a payment and companies I

could do because they know they have

some certainty around their debt it's

not like variable rate debt interest

expense

okay the market rate is 3% and it says

interest expense is three percent of the

preceding bond carrying amount so I'm

going to take point

three times the preceding blonde

carrying amount which this time is nine

two eight three eight right it's column

e the newest one nine two eight three

eight 2785 discount advertise ation 2785

- - 2500 is 285 discount account bound B

- C so 71-62 - 285 7 1 6 2 - 2 8 5 68 77

I don't know why that's still

highlighted let me unhighlight that and

last noticed places people scrub they go

92 - 6 like 92 - 68 hundred no no no

it's a hundred thousand - 68 70 seven

100,000 - 68 70 seven is 93 123 okay

there we have it we've completed part

one or part a we have completed our

effective interest table now we've got

to do our journal entries and we've done

journal entry we just have a couple more

so it says do the journal entry for the

first interest payment August 1st 2024

well hopefully this is not a surprise

we're gonna use data from this line

right the line marked August 1st 2024

and by the way what does this refer to

it's a six month period

it goes from February March April May

June July not August because we're on

August 1st

it's these six months that are kind of

wrapped up in this yellow highlighted

line so again this is related okay so

what's our journal entry then ah so it's

August 1st 2024 we make a payment so

credit cash

2,500 that's the interest payment on

that line so cash is going out 2500 now

I'm gonna skip over to interest expense

2777 so interest expense should be a

debit no surprise there

2777 and discount amortization 277 what

we're doing is we're making our discount

smaller by 277 so it was 70 for 39 debit

to make it smaller reduce it by 277 so

we'll credit our discount now the idea

here is man and this is where again will

hopefully help you to understand bonds

the idea here is this 74 39 this number

this discount number remember what's

happening here

we borrowed 92 561 we got to pay back

$100,000 this 74 39 difference this is

like extra interest right I borrow this

amount I got to pay back that amount

which is higher that's interest like no

doubt about it that's interest but it's

interest that happens over 10 years

because this is a 10-year bond and so

what we're saying is a little bit of at

a time we're gonna recognize that

interest so here we're recognizing so I

pay back 2500 in interest that's an

interest payment $2,500 and so of course

there's $2,500 in interest expense here

right like 2500 of this relates to this

cash payment the other 277 we're saying

oh that extra seven grand in money I

didn't get at the start of the bond I

got to recognize that interest expense

over the 10-year life of the bond so I'm

gonna recognize two hundred and seventy

seven extra dollars of interest right

now related to that discount and so

that's what that's what this table is

all about that's what this problem is

all about so hopefully that's a little

bit helpful if you don't understand the

concept behind it at least hopefully the

mechanics aren't too bad because

mechanically this is it's pretty

straightforward okay let's continue on

to our next entry unhighlight this

actually even take away that comment

there

our next relevant entry is the company's

fiscal year end September 30th 2024 so

we're actually gonna pull data from this

line now this line carries us from

August first so August September October

November December and January not

February because it's February first and

that again is six months now we're

interested in up to September thirtieth

so we're interested in the months of

August and September we're interested in

two months so what we're going to do is

take information from that highlighted

line and multiply by two sixths we're

interested in two sixths of that data so

let's do it

we'll start with our interest expense

2785 well it's not 2785 because there's

only two months so 2785 times two sixths

and again that's August 1st to September

thirtieth there's two months apart

right it's two months later not twenty

months two months later so that's why

two out of six months on the table so

our interest expense is going to be 27

85 just the number from that column

times 2/6 928

our discount amortization 285 again

times 2/6 and it's 95 so we credit our

discount because we want to reduce it by

95 and the last thing is cash but I

don't pay cash here right this $2,500 in

cash but let's take that 2500 times 2

sixths and I get 833 and sure enough

this works if you add a 33 and 95 you

get 9 28 so the thing balances but since

I'm not paying cash this is a payable

it's a liability it's it's building up

the interest that I owe this is interest

that will be paid but right now it's

payable so we have unpaid amount that

were is building that hasn't been paid

that's interest payable okay on to part

4 and this is on February 1st and you

can see here the second interest payment

February 1st so we're gonna use data

from this line but we've kind of already

dealt with the first two months now

we're gonna deal with the four months

following because again from August 4

from September 30th to February 1st 2025

is October November December January

don't count favor because it's February

1st four months later and sure enough

it's it's those four months October

November December January it's gonna be

four sixths of things on the line so our

interest expense 2785 well times four

sixths so let's start there twenty seven

eighty five times four sixths times four

divided by 6 1857

we're going to credit our discount and

the discount again will be the discount

amortization times 4 6 so 285 times 4 6

190 we're gonna credit now this interest

payment do I pay for 6 of the interest

on February 1st the answer is no I gotta

pay the full 2500 every six months I pay

2500 so credit cash 2500 here and I got

a journal entry that doesn't balance

2500 plus 19026 90 and credits - 1857

and debits I'm missing a debit here of

833 is that number ringing any bells and

it should be my interest payable is 833

and guess what I just paid $2,500 in

interest I don't have any interest

payable I've paid it off so we debit

interest payable for the amount of 833

and there we have it we've solved this

very difficult problem problem

9 3 a bonds issued a discount we've

prepared our effective interest table

and we've done the appropriate journal

entries I hope this video was helpful in

helping you helpful in helping you

better understand bonds it's been about

30 minutes if you made it to the end of

the video I hope it's worth a little

click on that old thumbs up button

thanks for your support and have a great

day everybody bye for now