 Hello in this lecture, we're going to work a problem which will be recording the bonds and at this point We're going to report the bonds at a premium. So we're going to have the information over here on the left hand side 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 then 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 We're going to post that to this blue area or we're going to record that to the blue area here Make the journal entries related to the information and then we'll post that to a quick trial balance on this side So we can see the activity that would happen in relation to other accounts over here We have the beginning trial balance. We can see that we are in balance the assets in blue We've got the liabilities in orange and we're gonna be working within liabilities because we're gonna be talking about bonds payable In this case and then we've got the equity retained earnings and sales We can see and expenses all we have our sales here of the 700 We have net income of 700, which is just the sales that are no expenses represented at this point We can see that we are in balance in that the at the debit accounts do not have brackets and the Credit accounts do therefore the debits minus the credits equals zero So this green zero represents the fact that we are in balance We're gonna record our transactions or post them here and then see what happens to the ending trial balance as we go through This process so that we can see the information within context of a trial balance We also have this worksheet here, which will be amortizing the interest and the premium So let's see what our information says over here Just want to contrast this a bit with a prior video that we had where we had a discount So this is going to be basically the same type of information But we are going to be giving the bonds at a premium in this case So remember what we're talking about here when we talk about bonds We have to think about who's giving the bond and who's receiving the bond We are giving the bond the bond is similar to a note and that we are gonna issue the bond We're gonna receive money on the date of issuance And then we will pay the interest and principle of the bond in accordance with the agreement of it So it's similar to a loan type agreement. We're gonna record journal entries and post to the trial balance So first item here on one one. We're gonna issue bonds which pay interest semi annually So basis of this bond Unlike a note one of the most common types of notes that we see are a mortgage and or a car payment Something like that where we pay off monthly and oftentimes we pay off both part of the interest and or fully interest Well part of the interest and part of the principle in terms of that doesn't have to be the only way A note is written or a bond is written or some kind of debt is written in this case We're gonna pay off the interest only and instead of paying it off on a monthly basis We're gonna pay it off semi yearly meaning, you know at half twice a year basically so that's how we're gonna record this and Many notes can be formatted in many different ways most common notes related to things that people do most often have most Awareness of our monthly and they are in format where they pay off both the interest and the principle Such as a mortgage or a car payment. So in this case, it's gonna be a 15-year note It's gonna have a fixed value of 240. It's gonna have an issue price of 270 interest Rate on the bond is 8 and market rate is 5 so first thing we want to distinguish on the note is there if it was a Note then the thing that we would often change in order to compete on the market to be able to sell it would often be The rate so as opposed to a bond if it were a note then And if we couldn't sell the note at at a rate of 8 percent that we're gonna pay back to the market then what we would do is Adjusted we would say well We're gonna bring it down to the market rate in this case a 5 percent in the case of a bond We can think of it as it's kind of already written. It's already written on paper or it's already written in stone We can't really change the rate if you look at the piece of paper the bond the bond says That it's gonna be for 15 years. It's gonna have a specific date. That's already on there It's got 240,000 being the face value That's how much is gonna have to be paid back at the end of the 15 year and the interest on the bond In this case is 8 percent. It's already written there. You can think of it as like written in stone can't change it therefore, what can you change if You can't basically this doesn't match the market and in this case the market is Giving a return of 5 percent, which is less. So investors coming to us We don't want to loan them the money and be paying interest at 8 percent when We could reduce the rate to 5 percent. That's what the market is We can't change the rates on the bond But what we can do is when we sell the bond we're gonna say, okay, we'll pay you 8 percent on the 240 that you give me today however Because the market rate is 5 percent if we're paying 8 percent on this note We would like to receive the difference basically in this case. We're gonna charge for this note 270 so you give us 270 now we give you 240 at the end of the 15 years back However, we're gonna pay 8 percent Which is the amount of interest on the bond and if you go anywhere else you're only gonna get 5 percent So that difference is basically supposed to be making up the interest on the note So let's record this and see what happens. First of all is cash affected. Yeah cash is affected We're gonna get money. We're issuing the bond and we are receiving money for it cash is a debit balance We want to make it go up. Therefore, we're gonna do the same thing to it which in this case would be a debit So I'm gonna right-click on cash. We're gonna copy cash in G20 gonna put my cell in C20 right-click hasted one two three We'll put the cash on top and how much cash are we gonna see receive We're gonna receive the 270 not the face amount of the bond but the amount of cash that we're actually gonna charge for it 270 any problem would have to basically give you that information. How do they come up with the 270? That's a different different story. We could talk about at a different time But it's basically the calculator between the difference in the rates. All right, and then What are we giving? We're gonna give a bond payable in this case. So here's the bond payable It's a liability and we're gonna pay back that liability at the end. We owe it Liabilities have credit balances. We need to make that bad thing go up Therefore we're gonna do the same thing to it. Which in this case is another credit. So we're gonna credit the bond I'm gonna right-click and copy the bond. I'm gonna put that in C21 right-click and paste it one two three And how much are we gonna credit it for? We're not gonna credit it for the 270 in this case We're gonna credit it for the face amount of the bond Why? Because that's how much we are actually gonna pay as of the end of the bond when it is Terminated when it's done after 15 years, which will be a credit of 240 I'm gonna represent the credit with a negative number for the purposes of this week worksheet 240,000 there we have that now we can see that of course the debits do not equal the credits We're out of balance by in this case 30,000 We need another 30,000 credits in order to put this thing in balance We could think of that as the negative sum. I'm gonna do this with a plug Formula so I'm gonna say instead of equals negative SUM Brackets and then highlight these four cells the 270 minus the 240 because that's a negative number Gives us the 30,000 now we can see that the two credits add up to 270 the debits add up to 270 If I highlight all of these cells then it adds up to zero. We are now in balance So now the only question is what are we gonna put that account to and if we take a look at our trial balance? What we're gonna put it into is the premium on the bond payable meaning it's kind of like part of the bond but we're gonna record it in a separate account and it's gonna basically be the Obviously what it is is it's cash that was paid over the face amount of the bond The reason cash was paid over the face amount of the bond is that the rate on the bond was 8% And the market rate is 5% Therefore, we're basically saying that the difference will be interest and we are going to write off that premium over the life of the bond and in this problem We're gonna do that with a straight line method So we're just gonna take it at a premium and by the end of the 15-year period where that premium will go down to zero We're basically gonna amortize it in a similar fashion as we Appreciate like a straight line appreciation on equipment So that's where the account's gonna go. I'm gonna copy that in G 24 right-click and copy put our cursor in C 22 right-click and paste 1 2 3 Oftentimes people have a problem with determining if it's a premium or a discount that we are talking about and I often think that it's easier to think of yourself as the person Purchasing something to think about whether it's a premium or a discount So obviously we are the people Issue in the bond the company issuing the bond into this case, but if we were the person buying the bond then if the sticker price Said it was 240 and we bought it for more than that That's gonna be a premium if they say there's a sale and we bought it the sticker price is 240 and we're gonna buy it for less than that then that would be a discount So most people can kind of think that we're discount in terms of it's like a sale We got a discount of on of it when we're purchasing it Of course when we're issuing the bond now now We're the person issuing the bond and we're issuing it at a premium meaning the face amount is here and We sold it for more than the face amount. Therefore. We sold it at a premium. All right, let's post this out and see what happens We're gonna post the cash first. Here's cash here. Here's cash here. We're gonna post it to I 20 So in I 20 we're gonna select equals and point to this 270. This is a debit. This is a debit Those are the same thing. That's gonna make this go up in the debit direction to 990 then we have a note payable. Here's the note payable. We're gonna post that to our the bond payable I should say here's the bond payable. We're gonna post that to bond payable here We're gonna post it to the blue area in I 23. We're gonna select equals and point to that 240 it's gonna make this go up in the credit direction to 240 we are of course out of balance by the last part that we must post at this time Which is going to be the premium. So here's the premium. Here's the premium We're gonna post it to the middle column in I 24. We'll select equals and point to that 30,000 that's gonna make this go up to 30,000 and put us back in balance So note what we have here is these are basically Related accounts the bonds payable if I highlight both of them. We have a carrying amount of 270 at this time Okay, and then the second item that will happen on 630. We're gonna say 630 record bond interest and straight line amortarization of interest So the first thing we can think is cash affected is cash affected It is in this case because we're gonna pay off the interest on the bond So we're paying we borrowed money. We borrowed the 270 issuing a 240 face amount of the bond now We're paying off Part of we're paying off the interest the use of that money. So we have a debit balance We need to make it go down So we're gonna do the opposite thing to it which in this case will be a credit So I'm gonna copy the cash gonna right-click copy the cash I'm gonna put that under the date so that the credits will go on the bottom So we are in C25 right-click and paste one two three and then the amount The question is how much should we credit if we pull out the calculator sometimes? It's easier to actually do the stuff in a calculator and then Pull it over. So we'll do it two ways here. We could say first question is what are we paying interest on and? Which rate do we use will be the second question? We're gonna use the face amount not the amount that we received Because we we said that we were going to pay interest on the face amount of the bottom It's already been written like that's the part that's written in stone So we have 240 that's been written in stone on the paper 240,000 we're gonna multiply that to the other thing that was written in stone on the piece of paper And what was written on the piece of paper? We're thinking it's written in stone because we can't change it and that's the interest on the bond It's not the market rate. It's gonna be the interest that's been written on the bond You could think of it as being on the bottom. We couldn't change that That's why we had to issue it at a different price than the face amount Therefore we're gonna multiply it times and I'm gonna do this in a decimal point oh eight and entered So we have 19 to however Remember that anytime we think about interest if we say that there's you're gonna pay five percent mortgage interest on the home That doesn't mean five percent per month The interest even though we never say per year is basically per year So that would be the interest if it was for an entire year However, we're gonna pay it semi-yearly or every six months. So there's a couple ways you can think of that I'm gonna do it with a ratio here So I can to think about it as dividing it by 12 and that means that we would have interest of 16 interest being like the rents on us borrowing the money of 1,006 times six months Because it's half a year and that will give us the nine six I'll do that same calculation over here. I'll slightly different So we're gonna put our cursor in e25 and select negative and we'll do that same thing. I'm gonna say it's 240 face amount times the rate of point oh eight and this time instead of saying nine twelve's Which is half a year one half. I'm gonna say just divided by two half a year and then enter And so that'll give us that nine six and then of course the debit is going to go to the bond interest That's gonna be an expense down here expense similar to like rent expense. We are using This money similar us using a building in order to help us generate revenue Expenses have debit balances. They only go up. We're gonna do the same thing to it Which is another debit so I'm gonna copy the bond interest expense down here on the income statement Put it in c24 right click and paste one two three Now the tricky thing is that we're not going to debit just the nine six We have another issue here that issue being the bond premium on the bond this 30,000 here We need to amortize over the life of the bond So we're basically just going to divide it out by the number of payments and then