 Hi, and welcome to this short presentation on effective interest rate amortization of a bond discount. So I have, what I really want to show you here is how to set up a table in Excel to amortize a discount or a premium for your bond. So our goal here is really going to be, we're going to complete this section here. But I want to take you through the whole process so you can see how this works together. So my example here is on January 1st of January 1, well whatever year, year one, we issued $100,000 five-year bonds at a price of $9190. What that means is our bond is going to sell for 91.9% of its face value. The stated rate is 6%. The bonds pay interest semi-annually, meaning twice a year, and the market rate is 8%. So the first thing I want to show you here is how we would journalize the bond issuance. Again, we would take that price, 91.9%, times the face value to get the amount of cash what the bond sells for. So we debit cash for that, we credit bond payable for the face value, and the discount becomes the difference between the two. Over here in number two, show how the bond will be presented on a partial balance sheet. We would list the bond payable, $100,000 as a liability. We would subtract the discount of $8,100, leaving us the bond carrying amount or carrying value of $91,900. Okay, then what is very typical in a homework problem or test problem is that we'd like you to journalize the interest payments. But this becomes kind of complicated without first creating an effective interest rates table. So this table here will allow us to, will calculate the amounts of this table, and we will use that information to populate, to use that information to populate these journal entries. So what I want to focus on really is how to create the table in Excel. You can see that I've started with the column for the dates, the column for the interest payment, column for interest expense, a column for discount amortization, a column for my discount balance, and for my bond carrying amount. I also have created one over here called check figure. This just helps me make sure that I'm doing everything correctly. It's not really part of the amortization table, but again, it's just a check figure to make sure I've done things correct. So I want to start with, in one one of year one, the day we issue the bonds, what are the balances in these accounts? Of course there's no interest payment on this day, there's no interest expense, there's no amortization. So what I have is a discount balance of 8,100, and a carrying amount, as you can see there, of 91,900. So I've just carried those amounts down into my table. So now our first interest payment is going to be on 6,30. So we need to figure out how do I calculate interest payments. Now remember, the bond is a 6% bond, meaning for the year it's going to pay 6% interest. Now what it's really going to do, since this is a semi-annual bond, is pay 3% interest in the first half of the year and 3% interest in the second half of the year. So I have listed this additional information here to help me calculate that on my table. The interest payment is based on the stated rate. So I have written on my table one half the stated rate, which is 3%. So I know that I'm going to use 3% in my calculations on this table, excuse me, in this column. The interest expense is based on the market rate. So again, the market rate is 4, excuse me, the market rate is 8, half the market rate is 4, and so this column is going to use 4%. So to calculate my interest payment, I'm going to take my half the stated rate of 3% times the bond face value of $100,000, and that's going to leave me $3,000 in interest payment. That is going to be the same interest payment in December, oops, darn it, I did not want to do that. Alright, that's what I'm trying to get to, so I can copy that down, and in fact I can copy that all the way through year five. Now, if you look at my formula, you can see that I have the dollar signs in there, meaning that I have made these cells an absolute reference, they will not move. If you're depending on how well you know Excel, you know that I have, by putting those dollar signs in there, I have kept those cells constant. Okay, now let's move over to my interest expense. Interest expense is calculated by taking the carrying amount of the bond times one half the market rate, and again I don't want the market rate to change, so I'm going to make those dollar signs. And so my interest expense is $36.76. My discount amortization is the difference between these two columns, so I'm going to take my interest expense minus my interest payment, and I'm going to amortize it $676. Now do I want my discount balance to increase or decrease over the life of the bond? I want it to decrease, and so in order to do that, I'm going to take that balance and subtract my discount amortization. And so now I'm reducing the balance of my discount. The bond carrying amount is just the opposite. I want the carrying amount to increase to the face value of the bond, so I'm going to take that beginning amount, and I'm going to add to it the amount of amortization. So I now have a new bond carrying amount. If I want to check that to see, because the carrying amount and the discount balance should always add to the face value, and I can see that it does. All right, now that I've done that, I can just copy. I have formulas in for all of these. I can just copy that down right to the very end, and again if I want to check it, I can see that it all balances. Now you notice I have one tiny problem here. I want the discount to go to zero, in this case it went to negative 16, meaning that I have just some rounding, little rounding problem. I want the carrying amount to grow to the face value, and here it went too much. Which means that rather than have a formula for this very last interest expense, I'm just going to need to plug the actual amount of interest expense, and I think I have $16 too much. So that would mean it should be $39.48. So if I enter $39.48, and by $39.48 I mean $39.46. Okay, so I entered $39.46. Now I have discount to zero, carrying amount growing to the face value. So I have now completed this table. Again, the purpose of the table is to help us journalize this information. So let's now go and journalize these random dates by using the information on the table. So the first one says, journalize the interest payment on June 30th of year one. So June 30th of year one, what is the amount of my interest expense? It is $36.76. What is the amount of my discount amortization? It is $6.76. What is the amount of my interest payment? It is $3,000. So I come right to this table, I pull off those three numbers, and they go right into my journal entry, and you can see that that journal entry balances. Okay, let's use it again. So let's take a look at, let's say your boss asks you to make the journal entry for December 31st of year two. He'd come out down here, December 31st year two. Those are the pieces of information that we need. So interest expense is $37.60, we're going to debit that amount. The discount is credited for $7.60, the cash payment is for $3,000. So taking that number from there, you can see how easy it is, how easy it becomes to make these journal entries. And finally, journalize the interest payment on December 31st year four. So that's this information here. Again, I'll just highlight that. Our interest expense $38.90, our discount $8.90, cash again $3,000. All right, so I hope this has helped you to create a table for a discount. If I were doing this for a premium, I would set this up the exact same way. I would only make a slight change here to my formulas where, you know, I would subtracting the interest payment from the interest expense. And maybe my addition or subtraction here would be slightly different. But if I've done it correctly, I still should be able to amortize the premium to zero and the bond carrying amount to go to the face value. Okay, I hope that helps.