 In this presentation, we will create an amortization table for the effective method of amortizing a bond discount. 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. Our information will be on the left side. We'll put the table into this table, the data into this table, and then we'll calculate a couple different journal entries related to this information and post them to a worksheet so that we can see what the effect is, how would we actually use this table in context. So if we go back to the left, our data is over here. We have the face amount of the bond, 100,000, stated rate, that's the rate on the actual bond, and then the market rate, which is the rate on the market, this is not on the actual bond, that's what we assume the market will be, semi-annual payments, two-year bond, that means that there's going to be two years, four time periods, because we're going to pay interest every six months, and the issue price is 96,454. The difference between the 100,000 and the 96,454 is going to be the discount, we're issuing it at a discount. Now that discount can be derived from calculating the present value and the difference between the stated rate and the market rate, so that's what the effect is. Now because of that, we can use the effective method and these two rates to allocate between the amount of interest and the amount of reduction in the unamortized discount. So let's see this in terms of the trial balance, what's on the trial balance at the start and what's going to happen as we go through this. So when we record the bond first off, we have it on the books now, we got 100,000, or we got cash of the difference between 96,454, then the bond is on the books for 100,000, that's what we owe at the end, and then we have this discount, which is the carrying amount, the difference between these two, 96,454, the actual money we got now. When we make payments on the bond, we're actually going to pay cash on the bond, but we're only going to pay cash based on the stated rate on the bond, and we're going to have to deal with this discount here some way. That discount needs to go away by the end of this bond. So what we're going to do is we're going to reduce this discount and record it to interest expense as the bond goes. Why are we going to reduce it and record it to interest expense? Because really that difference is due to the difference in interest rates. So we're going to reduce it to really kind of put that difference between the interest rate, take it from the bond rate to basically the market rate, and record the expense as we go. The easiest way to do that is just to take a straight line method, just to take this and divide it by however many payments we have, and then allocate it out just like we would in a depreciation type of method on a straight line depreciation. But that's not exactly right because it should change with the carrying value of the bond. So we should be, just as we do for amortization of a note, we should be figuring out exactly what the carrying amount is and figuring out what the interest portion then should be. Now if it's immaterial, it might be easiest and okay to just use a straight line method. If it's material, then we'd want to use the effective method, the preferred method. So on a straight line method, all we would do is we would just say, well, here's the unamortized discount, which is just the 100 minus the 96. Here's the carrying amount, which is always going to be a 100 minus the unamortized amount. And then we would just take this original unamortized amount and divide it by the number of periods, four, two years, two times a year, to get how much we're going to reduce it by an even amount each time period. And then we would reduce the unamortized discount by that amount. And then the carrying amount would always be the 100 minus the unamortized amount. So if it was straight line, which is not the preferred method, but an easy method, right, we would just always have the same amount here. We would reduce the unamortized by the same amount each time period, and then the carrying amount would also be changed by the same amount here. So it always would be the 100 minus the unamortized amount and so on and so forth until we get down to the period four, the last period, where the unamortized amount is zero and we're left with the 100,000, just the bond amount that we can then pay off at the term of the bond. So now we're going to do that same thing, but a little bit more complex method, the effective method. And this is a better allocation between the interest based on the carrying amount in a similar way as a note is when we allocate between interest and principle. So we're going to start off the same here. We're going to say that the unamortized discount is the 100 minus the 96,554. The carrying amount will always equal the 100 face amount minus the unamortized discount. Now we got to break out how much is going to be allocated to the unamortized discount. To do that, we're going to calculate the amount of cash that we pay. So when we pay cash, this is actually what we pay on a stated rate basis. So we're taking the 100,000 face amount on the bond times 0.08, that's the rate on the bond. That would be 8,000 a year, but we pay every six months. So we have to divide that by two, 4,000. So the amount that we're actually going to pay each time period will be the same. It's 100,000 times 0.08 divided by two. So that's the 4,000. And then the bond interest that we're going to have, it's going to be based on the carrying amount. So we're going to say this bond interest is equal to the carrying amount times, and then we're going to multiply it times the market rate. But that's for a year, so we have to divide it by two. So in other words, we're going to take the carrying amount, 96,454, kind of like if it was a note that'd be like the principal. And then we're going to multiply it times the market rate, like the real rate, the actual rate on the market, times 0.1. That would be for a year. And then we're going to divide that by two. So this would be the amount of bond interest, the actual bond interest here. Now, of course, that's greater than the cash paid. So the difference, the amortization change we're going to have is going to be equal to this 4,823 minus the 4,000. So that's the 823. So then the unamortized discount then is going to be that difference. So we're going to say the unamortized discount is going to go down by that 823. So it's going to be equal to the 3,546 minus the 823, or the 2,723, and then the carrying amount will always be equal to the 100,000 minus the unamortized discount. So we'll go through this process again. So same thing for the next payment. Again, the payment is always going to be the same. It's always just going to be the 100 times the amount on the bond divided by 2, because it's semi-annual. And then the bond interest is going to be based on the carrying amount, which of course has now changed. So that's going to equal the carrying amount times the market rate divided by 2. As we can see, these amounts then change. So the amortization amount here is going to be equal to the difference, this number minus this number. And you can see these numbers are changing as opposed to these here. So if we subtract those out then, we're going to say this is the prior unamortized discount minus the 862, giving us the 1,859, and then the carrying amount will always be the 100,000 minus the unamortized. So we'll do this again. If we do this again, we'll say this equals the payment. We could just say it's the 4,000. It's the same times the stated rate divided by 2. I want to divide it by 2. And then we'll take the bond interest, which is always going to be the carrying amount times the market rate divided by 2. The difference between those two is going to give us the change or the unamortized. And then we'll take the difference between the unamortized before and the change gives us our unamortized discount. The carrying amount will always be the 100,000 minus the unamortized. One more time. That payment, we're going to have the 100,000 times the 8% divided by 2. The bond interest is going to be the carrying amount times the market rate, 10%, divided by 2. The change then is going to be the change, the difference. And then the unamortized amount is going to be the prior unamortized minus this number. And of course it should go down to zero. That's how we know it's working. And then we're going to say that the carrying amount will always be the 100 minus the unamortized, which of course is zero. So there we have that. Now you might be saying, what if I had a whole lot of payments, wouldn't that be a tedious process? We can do this in Excel a lot easier. So let's just take a look at that real quick. After we do the first one, I'm going to delete these and just redo them. So I'm just going to select these and redo them. And let's just copy this row down and see if it does what we think. We can even delete this row. And let's copy this row down and see if it does what we think it should. And if it doesn't, then we'll see if we can fix it to make it just copy down. So I'll select these. We'll go to the autofill and copy that down. And we say, okay, this number looks right. This number, obviously something is wrong. What's wrong with it? This number is right, but then it pulled this down. I want that to stay at the 10%. So I'm going to have to use an absolute reference there. This number looks right. I mean, it would be right if the, and then this number looks like it's calculating right. And that looks like it's, it's doing something wrong again. It's pulling this number down. So we're going to have to fix two cells here. So if we delete this and then I've gone to the, to the bond here, this number, I don't want it to move down. So anything related to these data over here, we don't want it to move basically. So that means that this is B five. So within B five, I'm going to put my cursor right in there and put F four on the keyboard. That makes an absolute reference. You can also just put a dollar sign before the B and a dollar sign before the five. And then when we, when we copy it down, it'll, it'll copy down again. It has nothing to do with dollars. It's just a code telling Excel, don't move that cell when we copy it. And then the other one is going to be the carrying amount, which we pulled this number. And again, I don't want it to pull down when we copy down. I don't want it to go down to the 8%. So that B three, I'm going to put my cursor in the B three and push F four on the keyboard. Or you can just type a dollar sign before the B and dollars sign before the three. We only need one dollar sign typically, but two doesn't help, doesn't hurt any other. Yeah. Well, we'll use an absolute reference. So here we have that and then enter. And then we'll just select these again. And then I'm going to auto fill down and see if it does what we want. And so this looks reasonable. That looks like, right. That looks right. That looks right. That looks right. That looks right. And the check is that it went to zero. And of course, carrying amount is a hundred thousand. That's where we want to be. Okay. So let's record some of these. What would the journal entry look like? What are we actually doing here? Well, if we start off on our, our trial balance where we had, we had issued the bond and it's on the books for a hundred thousand discount here. And then we make our first payment in terms of interest and, and the discount. What's going to happen then is we're going to pay cash. So cash is affected. It's going down because we're going to pay interest. I'm going to right click and copy. I'm going to put it on the bottom and Q four, right click and paste one, two, three. How much are we going to pay? I'm going to put a negative to do the calculation. And we've already done it here. Right. We're going to pay this amount. I'll just pull it from the table. We're going to pay this amount, which is the 100,000 times the 8% divided by two. And then that's how much we're going to pay. And the debit's going to go to interest expense, but we also have to, to decrease this discount at the same time. So we do that typically at the same time. So this is a debit. We need to do the opposite thing to it. A credit. So I'm going to right click and copy that. And that's going to go underneath, right click and paste one, two, three. And we need the credit there. And that's going to come from our table. So now I'm going to say negative of this number on the table. That's what the table's for. And then we're going to debit the sum of those two 800 and 483 with a negative sum or our plug formula, some double click. I'm going to go from the bottom to the top, or you can just move this thing out of the way. And there's that. So our debits now equal the credits. You add them up, they add up to zero. And that's going to be interest expense. So we're going to put that to interest expense. Even though we only paid 4,000, we're allocating this discount amount. So our interest expense is 4,823. Right click and copy. That's going to go up top. Right click and paste one, two, three. So if we post this, here's the interest expense. Here it is on our trial balance. We want to be in the middle column, W12 equals, we'll point to that 4,823, bring the balance up out of balance now and the net income goes down by the interest expense, which is revenue minus expenses. That's income, not a loss. Cash is here. Cash will be in W3 equals, point to the cash. That's going to bring cash down. And then here's the discount. So we're in the discount. So in W7 equals, we'll point to that 823, bringing that discount down. So now if we compare this to our table, then we have a carrying amount on the table of 97277, unamortized discount 2723 after the first payment. So here's our 2723 and here's this minus this is the 97277. So then let's do one more payment. So I'll highlight this one. Now we're on the second one. And it'll be, in essence, the same journal entry, meaning the accounts will remain the same, but the amounts will differ as they do when we pay like a loan off that has an installment payment where we pay interest and principal. So I'm just going to copy the same accounts here, but then the cash that we're going to pay, we always pay the 4,000. That doesn't change the discount. And I'm going to put a negative of 4,000. The discount, however, is going to be this amount now. So it's going to be negative of this amount. And that'll change the amount of the expense, which will be the plug of negative sum. I'm going to go from the bottom to the top, or you can move this out of the way and enter. So similar, but not exact, just like when we make a loan payment, basically, because it deals with the same issue of this interest on the being based on the on the carrying amount. So we're going to say there's the bond interest. I'm going to double click on the bond interest expense to go there. Go to the end of it, plus 4,864 brings that up out of balance, brings net income down. Cash is here. Something's in it. So I'm going to double click on cash, go to the end of it and plus point to that 4,000 bringing this balance down. And then the bond discount is here. Here's the bond, the bond discount. Double click on it, go to the end of it and plus and we're going to point to that 864 and enter. So now we have this amount and this being the bond amount. So if we go to our table, here's the unamortized amount. Here's the carrying amount. And if we go back over to our numbers, here's the unamortized amount, which matches, of course, in the carrying amount being the difference between these two, which is 98141, 98141.