FA 41 - Bonds issued at a Discount
Summary
TLDRThis 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
- π The video discusses problem 9.3a from a counting workbook, which involves understanding bonds and their accounting treatment.
- πΌ 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.
- ποΈ 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.
- π‘ The attractiveness of bonds to investors, especially the elderly, is highlighted due to the stable income they provide through regular interest payments.
- π¦ Bonds are rated based on the creditworthiness of the issuer, with triple-A being the highest rating, indicating a very low risk of default.
- π 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.
- π’ 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.
- π 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.
- π 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.
- π The video demonstrates how to calculate the interest expense and discount amortization for each semi-annual period, adjusting for the effective interest rate.
- π 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
π 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.
π¦ 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.
π 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.
π 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.
βοΈ 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.
π 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.
Mindmap
Keywords
π‘Bond
π‘Interest
π‘Discount
π‘Premium
π‘Market Rate
π‘Maturity Date
π‘Amortization
π‘Interest Expense
π‘Bond Payable
π‘Journal Entry
π‘Effective Interest Method
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
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link and you can download a copy of this
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if you check the website and you click
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has either a public video or a
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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
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