FA 41 - Bonds issued at a Discount
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- เผยแพร่เมื่อ 28 พ.ค. 2024
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Module 9 examines bonds and liabilities. We learn how to account for bond discounts and premiums using the effective interest method.
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Honestly, I have watched 15 videos to try and understand this. I just wanted to thank you so much from a struggling student working remotely during Covid. You are a god-send!
Thank you, dear Dr. Bell, Nice work in simplifying one of the hardest topics in Accounting.
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Excellent explanation! The table makes it very easy to understand how the calculations work.
I've been trying to understand this topic for 2 weeks and although my Professor is a nice man, his explanations are quite complex and confusing. This helped me more than I can express. Thank you so much!
Got my Intermediate Financial Accounting book in the mail today! Doesnt seem to have any journal entries and basic topics like that but I'm still finishing this series, I feel more confident diving into it with some grasp on the basics.
Im struggling with this chapter and have my final exam on the 14th. Thank you for making discount/premium bonds easy to understand
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I had to watch this one 3 times. I've never taken an accounting course or anything so just familiarizing with the terms and understanding the whys takes a little doing. Overall these videos are fun!
This is great! Thanks! Could you make another one with the effects on CF statements?
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Are there different methods do doing bond issued at discount? Do you have to use the chart you created?
This is called the "effective interest rate method". There is also the "straight line method" but I don't cover it in my vids.
May someone pls tell me how could I find interest expense on sep30 if Idk market rate ?
Why do I have to use same interest expense, discount amortization etc dor fiscal year end Sep 30 and for second interest payment on Feb 1?
Greetings from Germany
bc the calculation for feb 1 2025 includes calculation for sept 30th 2024 as well. so you would use the same expense, discount etc. (aug 1st to feb 1st = 6months. but you're trying to calculate for sept, so its aug and sept = 2months. )
I have a big problem in understanding why we calculate at percent of market (92561*3% why?) we did this to calculate discount ? Why . i understood the technique but ignore reason .
as the bond was discounted because of the inflation in the market interest rate of bond. hence we calculate the market % as it was due to its inflation that the bonds were sold at a discount in the first place
Linger issued 100,000 for 10 years paid semi-annually at 5% while market value is at 6%.
calculate bond at a discount
pv= FV/(1+r)^20, pv=FV/(1+.03)^20, Pv= 55,367.57 ( this represents the lumpsum that will be 100,000. * 55,367.57 (1.03^20)= 100,000)
present value of interest= cashflow(1-(1+r)^-20/R , 2500(1-.5537)/R, = 37,193.63 ( this represents the present value of the interest that will be paid)
the sum of 55.367.57+37,193.63=92,561.257 (this number represents the carrying value of the bond.)
100,000-92,561.257=7438.74 (that amount is the discount amortization)
DATE Cash Interest Discount Carrying Value
paid expense amor
01-Feb 92,561.26
01-Aug 2500 2776.83 276.83 92,838.10
01-Feb 2500 2,785.14 285.14 93,123.24
01-Aug 2500 2,793.70 293.70 93,416.94
01-Feb 2500 2,802.51 302.51 93,719.45
01-Aug 2500 2,811.58 311.58 94,031.03
01-Feb 2500 2,820.93 320.93 94,351.96
01-Aug 2500 2,830.56 330.56 94,682.52
01-Feb 2500 2,840.48 340.48 95,022.99
01-Aug 2500 2,850.69 350.69 95,373.68
01-Feb 2500 2,861.21 361.21 95,734.90
01-Aug 2500 2,872.05 372.05 96,106.94
01-Feb 2500 2,883.21 383.21 96,490.15
01-Aug 2500 2,894.70 394.70 96,884.85
01-Feb 2500 2,906.55 406.55 97,291.40
01-Aug 2500 2,918.74 418.74 97,710.14
01-Feb 2500 2,931.30 431.30 98,141.45
01-Aug 2500 2,944.24 444.24 98,585.69
01-Feb 2500 2,957.57 457.57 99,043.26
01-Aug 2500 2,971.30 471.30 99,514.56
01-Feb 2500 2,985.44 485.44 100,000.00
TOTAL 50000 57438.73 7438.73
conclusion: the leg work in getting the bonds out is set at 5% semi for 10 years face value 100,000. You can't change that now, but you can
reduce the price or the issuance of bonds at a discount if the market offers better. Notice how interest expense covers cash paid and discount amortization.
01/Feb
cash 92,561.26 (debit discount bonds payable when issuing bonds in the journal entry)
Discount Bonds payable 7438.73
Bonds payable 100,000
01/Aug
Interest expense 2776.83
discount amortization 276.83 (credit discount amortization every time you make a payment )
Cash 2500
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This is a though method to wrap my head around. I have a question. What happens with the Bonds payable account?
it decreases i.e debited and the cash is credited ( decreases) on making the payments for the promised bonds
Bond payable will stay on your Balance until you paid it back. Like in MIT example, $500ml bond payable will stay as a liability for 110 years. MIT will be paying only interests on it. Your question was a year ago, I am sure you know it by now:)
When writing journal entry. You put discount or premium with the interest expense and cash. Are the Discount and premium account a liability account or fall under gains or loss in the income statement?
Discount and Premium add to the bond amount. So Bond - Discount = Bond, Net. Bond + premium = Bond, Net.
Thanks
What would I do if the problem I'm working on doesn't provide a bond quote? How would I figure out how much money ill actually receive?
It ought to give you something. If it doesn't you may need to calculate it - it's fairly complicated - but I'm sure you can find a video tutorial - "Calculating bond price"
What did you say about the brain frozen thing?
hahahah I loved the part where you are going to freeze your brain!! Thank you for your explanations :)
I’ve been wondering, why do we multiply by the market rate when calculating the interest expense?
It's got to do with the discount or premium. When we issue the bonds, investors won't buy until they are receiving the market rate - so I issue a 100,000 4% bond when the market rate of interest is 6%. So they issue at a discount and I get 90,000. The extra 10K (the discount) is extra interest, meaning I pay back 6%. The size of the discount is dictated by the market rate. Sorry - I know it's a complex idea, and it's difficult to type out!
@@Tony-Bell Hi Tony, thanks for this video. It's slowly making sense. Question to this reply, how did you arrive at $90,000 being the amount that we receive at discount? Is this from the bond quote percentage like you mentioned in the video?
I'm actually immortal Tony :)
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