 In this presentation we will take a look at the journal entry related to issuing a bond at a premium. Support a counting 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. When considering the journal entry for a bond remember what can change and what is the same for a bond when we think about a bond it's already been printed. We know the amount of the bond the interest on the bond the maturity date of the bond these are already set so if we're making a negotiation with the bond after it had already been printed then we can't change the face amount we can't change the interest due dates what can we change in order to negotiate and make a sales price on the bond we can change the amount that we issue it for. So keep that in mind whenever you think about these bond problems that's the thing that's going to differ from a bond to a note. The thing that changes when we want to loan is the interest rate. The thing that changes when we want to issue a bond that's already been made is going to be the amount we receive for the bond being different than the face amount of the bond if there's a difference in the market race and the contract rate. So in this example we're saying that we issued a bond. Now note that when we think about the issuance of the bond just like a note we often have more information than we really need and that can be a little bit confusing for us. So here we have the number of years on the bond we've got the face amount of the bond and we're actually given the issue price on the bond and then we got the interest rate on the bond and the market rate. Now if they give you the interest rate I mean if they give you the amount that you issue the bond for then all this other stuff is not even needed just like it is with a note like I don't even know I don't need to know the interest either the market rate or the or the rate of interest on the bond in order to record the issuance of the bond if it's given to me how much we we issued the bond for because the interest will come into play when we make the interest payments at a later time as we incur interest as time passes what we do want to realize just from my theory standpoint however is the reason why we're issuing the price for 270 when the face of amount of the bond is 240 and that is because the face amount is what we're gonna pay back at the end of the term of the bond just like a note so normally you would say you would think hmm well we're gonna pay back 240 at the end we would like 240 now we'll pay back the 240 at the end plus interest but we're not gonna do that because the rate of interest on the bond difference from the market our bond rate the contract rate is 8% we're gonna be paying on this bond 8% of the 240,000 but the market rate is only 5% meaning other people could go elsewhere and only get a 5% return and we're paying an out an 8% return so that means that we're gonna say well that's true we can't lower this to 5% what we can do is say well you know we're paying out more interest than other people are paying so instead of getting the face amount the 240 if you give us 270,000 now we will give you back 240 at the end of the time period and we'll pay you out this higher interest rate to make up the difference the 8% rather than what you would get elsewhere which is just the 5% so that's the reason for this but if we record this out we're just gonna say well is cash affected we're gonna say yeah we got cash that's why we're issuing the bond with a company we're issuing the bond cash has a debit balance we're gonna make it go up doing the same thing to it note it's always nice to have a trial balance here so this is just a short trial balance just to show us something that is in balance as we issue these so we've got debits being non- bracketed or positive credits bracketed or negative debits minus credits equaling zero meaning debits equal the credits and the net income is currently 700,000 revenue less zero expenses that's that's income not a loss so we're going to debit cash increasing the cash that's why we're issuing the bond and then we're going to have the bond payable for the 240 note the difference here we only we got 270 we got more cash then we owe at the end of the bond we only owe 240 so there's a difference of course and that's going to be the 30,000 and that's going to go to what we're going to call a premium it's going to be the premium on the bond so if we record this we can see what it's going to look like the cash is here here it is on the trial balance it's going to go from 270 uh 720,000 up by 272 990,000 the bond is going to go from zero up in the credit direction to 240 and then the premium so here's the premium is going to go from zero up by 30 to 30,000 so what does this mean then well of course we got cash that's the point and then we owe back 240,000 at the maturity of the bond but then we have this other 30,000 that looks you know it's it's part of this meaning the carrying value of the bond if we add those together is actually going to add up of course to the 270 but the question then is well what are we going to do with this premium I mean it has to go away at the end of the time period and we're not going to pay it out at the end we're only going to pay 240,000 so as we pay interest payments we're going to reduce this premium at the same point in time periodically as we record interest payments we're going to record it and reduce it as the bond goes through towards maturity in the form of interest expense this should seem unusual because what's going to happen is we're going to have to credit we're going to have to debit this to make it go down and we're going to credit interest expense which is weird because interest expense is an expense and it only typically goes up we're not really generating revenue here but note what's really happening here why is that the case well this premium is a result of the our interest payments of 8% being higher than the market rate so really what's going to happen is we're going to pay out the 8% on the market on the on the bonds here because that's our contract price but then we're going to reduce it by the premium amount and so really our interest payments are going to be closer to the to the market rate we're kind of putting that difference between the market rate by reducing the premium so when we record interest expense we're going to be increasing it by what we pay the 8% and then decreasing it by the allocation of the premium which is really a result of that difference between the market rate and the contract rate also note of course there's no activity on the net income at this time so it's all balance sheet accounts we got cash we owe back in the future we will record the interest as we go through time as we incur interest as the as the money is being used that's when we're going to record the interest expense in accordance with the matching principle