 Hello and welcome to this session. This is Professor Farhad in which we would look at a CPA questions that deals with the bond investment. Bonds are challenging for many reasons. One is you have to know how to compute their carrying value. You have to know how to compute the price of the bond. You have to know how to redeem a bond. You have to know how to compute the amortization of a bond. So the bond, they have many topics and all these topics are interrelated and challenging. So on this question, I will try to show you how you should approach a bond question. Before I start, I would like to remind you to connect with me on LinkedIn and subscribe to my YouTube. On my website, farhadlectures.com, you will find additional information whether you are taking your CPA exam or you are taking your accounting courses. I strongly suggest you check out my website. I do not replace your Becker, Roger, Wiley or Gleim. What I do is I compliment. I cover the material a little bit more in depth than the other courses because the other courses, they don't teach you the material. They review the material with you. I teach you the material. So my website will be a great supplemental with your accounting course. Let's go ahead and take a look at this question and see how we will approach this question on the CPA exam. On October 1st, 2014, the date is extremely important when it comes to bonds. Adam Company purchased to hold to maturity 3,1009% bond for 2,970,000, which includes 45,000 in accrued interest. There's a lot of information giving in this sentence. So you have to understand the information giving in the first place. You have to know how to read a bond information. What are we saying here? Well, what happened is Adam Company purchased. Now remember, they purchased a bond, not issued a bond. And how many did they purchase? 3,000 bonds. So they purchased 3,000 bond. Each bond is worth $1,000. So they purchased $3 million worth of bonds. This is what they purchased. They paid 2,970,000 of which 45,000 is accrued interest. Notice we are giving right in the first statement a lot of information. So if you don't know what you are giving, there's no way you can answer the question. Second statement, the bonds, which mature February 1st, 2013, pay semi-annual interest on February 1st and August 1st. So simply put, February 1st, 2013 is approximately eight years and four months. Now on the CPA exam, usually they don't give you those odd dates. The reason in my questions I give you odd dates is to challenge you to think about the problem. I want to make sure you pay attention to the dates. That's my guess is they don't give you like, you know, October and February. They may give you easier dates. Adam uses the straight line method of amortization. So in this problem, we are using the straight line. So you also have to know the difference between the straight line method and the effective interest rate method. Again, if you go to my website, farhatlectures.com, you will see detailed explanation. The bond was trading at 101 on December 31st, 2014. The bonds should be reported in December 31st, 2013 at carrying value of how much? Simply put, they want us to know how much should we report the carrying value of the bond on December 31st, 2014. Simply put, what's the book value of the bond? Well, the process of elimination is important when you are answering CPA questions. You should be able to eliminate at least two answer choices immediately, as long as you have a basic understanding of the problem. Which two answer choices you could eliminate immediately? One, I could eliminate D. Why? D is given me the market value of the bond. So what these tell me, you have three million worth of bonds. They are trading at 101. Therefore, the value of the bond, the fair market value, should be 3 million and 30,000. That's fine. But since the bonds are held to maturity, I don't carry about the market value. So notice the bond trading and what 101 is to trick you. So you can eliminate D. Also, what else could you eliminate? Well, remember, you purchased the bond for 2,970,000. This amount included 45,000 worth of interest. Well, guess what? There is no way the bond carrying value is 2,970,000, because this is what you actually paid for the bond. So you could also eliminate this answer choice. Basically, now you are down to two choices. At this point, if you are stuck, you can basically guess 50-50. At least you have that chance, but you don't have to guess. Here you have to do a small computation to find out the value of the bond. Well, let's start with, let me pull the calculator here. Have the calculator ready, because you will need the calculator now. And let's go ahead and start with, let me see if I can have the calculator. Okay, so you have a bond. You have a bond of 2,970,000, of which 45,000 is a crude interest. Therefore, the true value of the bond, when you purchase the bond, the bond by itself is 2,925,000. So 2,925,000. And once you get to this computation immediately, you would know if the bond was worth this much on October 1st, it cannot be worth that much on December 31st. And then you answer the question, the answer is V. But let me show you how the answer is V specifically. But at this point, I did not do any computation yet, in a sense of amortizing the bond, and I was able to find that the answer is V. Now, what happened is this. If the bond value is 2 million, so this is the bond true value when you purchase it, because the additional 45,000 was for a crude interest. This means this bond is a discount bond, and it has a discount of 75,000. How did I know it's 75,000? Well, the face value is 3 million, and the value of the bond, what I paid is 2,925,000. So if we take 3 million minus 2,925,000, we have a discount of 75,000. Now, what do we do with the discount? We are going to amortize the discount. In this problem, they ask us to amortize the discount using the straight line method. Many students are intimidated by the straight line method. The straight line method, I believe it's easier than the effective interest rate method. How do we use the straight line method? You will take the discount and you spread it. You divide it by the remaining of period, remaining in the life of the bond. Now, in this situation, we have to compute the period monthly, because what happened in this problem is we purchased the bond in October, so here's on a timeline what this bond looks like. So we purchased the bond in October, October 1st. It's going to pay interest. It will not pay any interest until February 1st. But what happened is we have to compute October, November, and December. How much did we amortize of the discount? So here we're looking at three month worth of discount. And that's why I said I have to compute the discount based on monthly basis. Now, I'm going to go back to the previous slide. Based on monthly basis. Now, how much is this discount? 75,000. What is the period remaining? Well, we're going to have to count from October 1st, 2014, till February 1st, 2023. That's eight year and four month. So the period is eight year plus four month until the bond mature. And that's equal to 100 month. Okay? So what does that mean? It means you're going to take the 75,000 dollar divided by 100 month. And this is going to give you 750 of amortization, amortization discount per month. Now what you do, you'll take 750 times three, which is October, November, and December. So 750 times three is 2200, 2200 and 50. Well, you started with the bond. 2225, the original value or what you paid for it, plus 2250. And that's going to give you, and that's going to give you this answer, B, 2927,250, which is the book value of the bond. And this is how you come up with this answer. Once again, I would like to remind you, if you like this recording, please like it and share it. And I strongly suggest you check out my website, if not for anything, is how well did your university perform on the CPA exam? Maybe you want to know how well is your university doing, because that's a good indication of your accounting program. Once again, I don't replace your CPA prep courses. I compliment them. The CPA is a long-term investment. Don't shortchange yourself. Check out my website. I might be able to add 10 to 15 points to your score, which will give you a passing score. Good luck and study hard.