 Hello, in this lecture we will define bond 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. According to fundamental accounting principles, Wild 22nd edition, the definition of bond is written promise to pay the bonds par or face value and interest at a stated contract rate often issued in denominations of 1000. When we think of bonds as individuals, we may often think of at least I often think of us as invested in bonds investing in stocks and bonds bonds being a form of investment. Often people invest in things like treasury bonds bonds from the government or other bonds bonds from corporations. We here will be looking at the definition of bond from the perspective of the issuer of the bond from the perspective of the company issuing the bond. When a company issues a bond, it's very similar to a note when a company is going to issue a note, they need cash flow. Therefore, they're going to issue a bond, they're going to receive cash flow. What's going to be the difference between a bond and a note often is you can think about it in terms of what we're going to change basically in order to issue the bond at the market rate. When we issue a note, usually what we change if we say we're going to take so much cash, if we're going to get in this case 240,000 of cash for a loan, then we usually change the payment patterns and adjust the interest rate in order to come to an agreement, a free market agreement in terms of what will be an acceptable interest rate for the loaning of the money. In terms of a bond, we can often think of it as the interest rate being set. So if we look at the bond, we're going to say, okay, now we have the amount, the face amount that we owe back at the end of the bond being set, and we also have the interest rate. We can say, okay, the interest rate is on the bond. Therefore, if there's a change in market interest rate, in this case, 8% interest rate for the market to what is on the bond, printed on the bond, then we can't change the bond rate. What are we going to change then in order to issue the bond and receive money for the bond? We're going to have to change the issue price. So that's going to be kind of one of the major differences when we record the bonds. We will be adjusting not the interest rate to a market value, but we will be adjusting the issue price. So in this case, if we were to record this, then we're going to say that we're going to have to owe 240,000. That's the face amount of the bond at the end of the bond term. However, we're going to issue the bond for 198,484. I'm not going to go through the calculation to get there at this point, but I just want to note that that amount is less than the amount that we're going to pay back at the end of the bond period. The reason being is because the market rate in this example, the rate that's going to be a market not on the bond, that's going to be a rate that we assume that both parties know in a free market. And the interest rate that is on the bond is less than the market rate. What that means is that the bond purchaser could go somewhere else, loan their money somewhere else, and get 8% return. And we're only given 6% return. Well, we can't change the 6%. What we can do is say, hey, we're going to give you the 240,000 at the end. And we'll accept instead of 240,000 at the front end, 198,484, something less. That of course leads to a difference in this case being the discount. So now we have a discount. If we were to record that then, we would have the cash we received increasing cash. We have the payable that we're going to owe back at the end of the bond. Then we have this discount as well. So the net value of the bond at this point in time is the 240,000 minus the 41516, which of course would equal the cash that we received at this point in time. As the bond processes until we have to pay it at the end of the bond term, we need to decrease this 41516 and that decrease will basically be going to interest. So we will decrease this amount as we make the interest payments at the end of the bond term. Then we'll be left with the 240,000 and we'll pay off the bonds. Now there's a lot of different types of bonds that we could get into different formats of bonds, how we're going to have the payment structure be set up. However, they're all going to be a form of a payable that will be due if we're issuing the bond and we're generally going to have either a discount or a premium on the issue of the bond unless we issue them for exactly the face amount, a situation where the market interest rate would be equal to the interest rate on the face of the bond.