 Hello in this lecture, we will define book value of bonds 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 win 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 book value of bonds is Net amount at which bonds are reported on the balance sheet equals power value of the bonds less any unamortized Discount plus any unamortized premium when we're considering the book value of the bonds We're saying what's the value of the bonds that will be reported on the balance sheet? Net of the premium or discount therefore. What is the premium or discount? How does it get there and how are we going to report these bonds when we're considering the bonds? We usually think of bonds in terms of us purchasing the bonds often times in terms of investments However, we are considering the bonds in this case as if we are a corporation Who is issuing the bonds in a similar way that if we needed cash flow We might issue some have a loan and have someone loan us money The difference between bonds and a loan in order for a company to receive Financing has to do with the idea that when we have a loan One of the things we usually change in terms of finding a agreement a market value of the loan will be the interest rate But in terms of bonds the interest rates going to be stated on the bond So if the interest rate is stated on the bond It's not the thing that we can then change in order to find market value in order to get an agreement Therefore we got to do something else So the things that are fixed on the bonds we can think about are going to be the face amount and the interest rate What could we then change? We can change the amount. We're going to receive for the bonds So in this case, we're going to say the bonds have a face amount of 240,000 meaning to We're going to issue them. We're gonna have to pay back. I'm sorry $240,000 at the end of the bond so you would think under a normal financing We would receive at the front end 240,000 and then have some format of interest that would be charging that would be the normal loan set up However, in this case, we're not going to adjust the interest. What we're going to say is we will pay you back 240,000 at the end We'll accept something greater or different based on what the market is at this point in time and in this example We're saying hey We have an interest rate of six percent if you could go somewhere else to the market and get something greater than that Say eight percent then you're not going to receive our bond We're not going to be able to sell our bond unless we do it unless we sell it for less than the face amount So that's going to be the case here. That would be the case of a discount We sell the bond at a discount if however the rate on the bond happened to be higher Then the current market rate then the person loaning us the money Would not be able to do as well somewhere else Therefore we would have a lot of people that would want our bonds Therefore, we would say hey, we're going to give you the bonds at a higher price at a premium So if we were to record this particular bond, we're going to record it at a discount So we're going to receive something less than what we're going to pay back at the end So there's the cash we're going to receive. How would we come up with that number? We would go through a calculation to do that I'm not going to go through the calculation at this point in time All I want to know at this point in time is that the cash We would have to receive is less than the bond payable that we would have on the books that we would have to pay back at the end resulting in this debit of the discount on the bond payable when we record that obviously we're going to get cash That's why we're issuing the bonds the payable goes on the books Representing the fact that we owe it back at the end of the bond term at the face amount 240,000 then we have the discount on the bonds. That's going to be the 41 516 in this case therefore when we think about the bonds the book value of the bonds is going to be the 240,000 at this point Minus in this case the discount of the 41 516 is kind of like the real value of the bonds Because of course, that's what we sold it for at this point in time 198 484 now of course in some form or the other over the life of the bond in this case 15 years We're gonna have to reduce this or allocate out this discount So it should be at zero by the end of that 15 year time period so that we're paying back just the principle of the 240,000 in this case and therefore the discount on the bond is going to to be Expensed in the form of interest expense and that makes sense because really the difference here this this whole discount is in place Because of the difference in the interest rates because of the difference in the stated rate and the market rate now If we were at a premium then this would be a credit here and we'd have to add them together We would have received more money than What we issued the bond for and we would have to amortize that premium Over the life of the bond again leaving us with the 240 in this case face value of the bond that we would then pay back At the end of the bond period You