 In this presentation, we will record the journal entry for the issuance of a bond at a premium. 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. The information will be on the left side. We're going to enter that into our general journal and then post that to our worksheet. We got our trial balance, which will be an order assets and then liabilities, equity, revenue and expenses just given us something that's in balance so we can see what the effect is on the accounting equation and individual accounts. We can see that the debits are positive numbers, credits are negative numbers, debits minus the credits therefore equaling zero and meaning that the debits equal the credits and the income is going to be 700,000 sales or revenue and net income being the 700,000 sales being income minus expenses, revenue not a loss. So we have our data over here, we're going to issue bonds which pay interest semi-annually, a number of years, 15 years, face value, 240, issue price, 270, interest, 8%, market rate, 5%. Now, the thing about the issuance of the bonds is that when we look at a book problem, they're often going to give us different types of information depending on what type of bond problem we're looking at, meaning when we issue the bond, they're probably just going to give us the face amount of the bond and the issue price or indicate some way to calculate the issue price and they may not even give us the interest rates or they may give it just as more information, we don't even need it for the issuance of the bond. But what we need to or in a more comprehensive problem, they could try to give us the difference in the rates and have us determine what we think the interest rate, what the price, the issue price should be based on that difference in the interest rates. So we need to understand that there's a relationship there, although if they give us these two numbers, then we don't even need to know what the interest rates are, either the bond rate or the either rate doesn't matter because this is all we need to know to actually record the bond. Just in terms of theory, we need to understand that why are these two different? Well, the issue price here is greater than the amount on the bond. Why would that happen? Well, the amount of the bond means that we are going to give back 240,000. It's important to note the difference is easier to remember for me, at least to know what is actually physically on the bond. What is the contract versus what's not on the contract? And the 240,000 is on the contract. That's on the bond. That's what we promise to pay back if we sell the bond. If the contract rate is the 8%, it's on the bond. That's what it's on the terms. The issue price is not. That's a market-based thing. We're going to sell it for whatever we can. The market rate is clearly a market rate thing. It's not on the bond. So it's helpful to think about what's on the bond, what's not. Now, if the bond says we're going to pay 240,000 at the end of the term, you would think that we would receive 240 now, pay it back at the end, plus interest. However, that's not the case. We're going to get 270. Because of the returns that we're going to pay, we have on the contract, we're going to pay back according to the contract 8%. But if people went elsewhere, they would only get 5% on the contract. So we can't change these rates. They're already there. So that means that what we're going to do instead is we're going to say, well, we'll pay you back 240, but we're giving you more interest than others would. And therefore, we expect more money now. So again, we're going to sell the bond for whatever we can. And it's determined that we're able to sell it on the market for 270, presumably because of the difference between the market interest rate and what we have on the bond. But in any case, if we have these two pieces of information, we can just build the transaction using that. And I would approach these by always just make the journal entry, asking our questions first, is cash affected? We're going to say, yeah, that's why we're issuing the bond. Cash is going up. Cash has a debit balance. We'll make it go up doing the same thing to another debit. So in G3, right-click and copy. We're going to put that up top in C3, right-click and paste 123. And the amounts that we're going to get is going to be equal to... Well, they just gave it here. So they're going to give it to us in this problem. So it's 270. And then we're going to credit what we owe back, just like if it was a note. So I'm going to credit bonds payable. It's just a liability. We owe it back. We're going to say right-click and copy. Put that in C4, right-click and paste 123. Now, the amount will differ, however, because we're going to owe back whatever's on the contract, which is the face amount. So after 15 years, we're going to pay back credit 240,000. The difference between those two is something we're going to need. It's a credit, in this case, 270 minus 240 or 30,000. We will do that with a plug formula, which is negative SUM. Double-click the sum function, and we'll highlight those four cells and enter. So there's the 30,000. Where's that going to go? Well, now the question is, is it a discount or a premium, typically? Here we can see it's a premium because it's in our problem. But usually that's going to be the question. Well, how do you know? I usually think about it in terms of the person purchasing the bond, meaning if I was purchasing something and it basically had a face amount, kind of like the sticker price of 240, and we're paying more for it, we're paying 270, then we're not getting a discount. We're not buying it for less, we're buying more. We're buying it at a premium. So that's how I would think of it. I would think about, is it a discount first? If it's not, then it must be a premium. So we're selling this, in our case, at a premium. So here's the premium. It's going to be in the liability section, and it's going to be linked to the bond account, as we'll see. So I'm going to right-click and copy. We'll put that in C5, right-click and paste 1, 2, 3. I'm going to indent these two by highlighting them. Home tab, alignment, increase indenting. So there's our transaction. Let's post it and see what happens. Here's cash, and note what we didn't use on this transaction. I didn't need the interest rates at all. It was given to us what we sold it for and the face amount. So here's cash. Here's cash. We're going to be in I3 equals, and we're going to go to the 270, bringing cash up. And then we're going to go to the bonds payable. Here's bonds payable. We're in I6 equals. We're going to increase the bond payable to the 240 and enter. And then we're going to go to the premium here in I7 equals the premium, bringing the premium up. And there we have it. Now, you might be asking, well, how would you know what the issue price will be? We'll talk about ways to calculate what we think the market right, what the market price should be. But again, problems will usually separate those two types of things out, the recording, giving us whatever we sold it for, and another issue being how to determine what we should be selling it for. Okay. So now we have this on the books. We can see that the payment is for 240. We can see that we didn't need the interest at all. There's nothing happening to interest expense now. It's just like a note. It went on the books now. We owe it back. We'll start dealing with interest as time passes. That's what interest is. It's kind of like rent on the loan that we got, the money that we got. So we're going to pay 240,000 at the end. What are we going to do with this premium? What, you know, what are we going to do with that? At the end, we're going to pay 240, but we got to get rid of this premium somehow as well. And the way we're going to do that is we're going to reduce it each time period as we make the semi-annual payments. We're going to amortize it over that time period and we're going to reduce it from here, debiting this and crediting interest expense, which should seem unusual to us because normally interest expense is only going to be debited. Why would we do that? The reason we're doing this is because this premium is really a result of the difference between the market rate and the rate on the face of the bond. It's really a difference in interest. When we record the interest here on a semi-annual basis, we will actually pay interest and then we'll adjust it kind of close to like the market rate by reducing the premium and also recording it to the interest. So as we record our interest payments, we will also reduce this premium and we'll talk about how to do that next time.