 In this presentation, we will calculate the amortization of a premium and record the journal entry related to the premium and the pain of interest on a bond issued at a premium. 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 when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Information will be on the left. We're going to enter that into our general journal and then post that to our worksheet. The worksheet will be in order. We've got the assets in green, the liabilities in orange, the revenue in light blue or the equity in light blue revenue and expenses income statement accounts in dark blue. The debits are positive, credits are negative, the debits minus the credits equals zero, indicating we are in balance. We currently have revenue 700,000 sales, 700 revenue minus zero expenses at this time. This is meant just to give us something in balance so that when we record these transactions we get some idea of something started in balance and what the effects will be on the accounting equation individual accounts. So we have issued the bond here. So the bond has been issued for 270,000 when it had a face amount of 240. That means there's a difference in 30,000. That's where we start on the books. We've got 240. That's what we're going to pay back at the end of term 15 years in this case 30 periods because it's semi annual. And then we have this discount meaning the carrying amount of course is the 270 what we actually got for the bond. So the carrying amount will equal what we got paid for the bond at the point of the issuance of the bond. So now what we need to do is record the interest and the amortization. There's going to be two things there that we deal with. One is how much we pay in interest kind of like rent just like on the loan rent on the use of the money. And the other is to get rid of this amortized premium on this premium. And what we're going to do is we're going to reduce the premium and record the difference to the bond interest expense. Why? Because this premium is really a result of interest. It's really a result of the difference between the market rate and the bond rate or that's going to be the presumed difference or the reason that this is the case, the reason for the premium. And therefore we're going to reduce it to the interest expense as we go as we make payments. So we'll do that with a straight line amortization. This is going to be a simplified amortization method. It's not the effective method, which is the preferred generally accepted accounting principle method. But it gives us a really good idea of what we're doing. It lines up well to how we've seen amortization starting including similar to a depreciation problem. And it can be used if the difference between the interest on the effective and the straight line method is small or in material. So what we're going to do is we're going to say we're going to take this original premium amount, the unamortized amount. We're going to put that here. I'm going to do that with a little formula. I'm going to take this amount. So I'm going to say negative of this number. Now don't pick up the ending number or you can have a problem once we do journal entries. So the beginning number or you just type in the 30,000 and then the carrying amount is going to be these two added the 240 plus 30. Now I'm going to do that with a little formula again, which can be a little bit confusing, but it's going to be negative. Or we could say negative some meaning I'm going to sum up these two numbers and then flip the sign. So there's the 270. You can just type in 270 in this one. Okay. So then we're going to calculate the amortized amount. Now the amount that is going to be amortized is simply going to be under a straight line method, the 30,000 divided by the by the number of periods. There's 15 years and it's every two years. So that would be 15 times two or 30. You can also think about it if it's helpful to say, okay, it's 30,000 divided by the number of years, which is 15. And then say two times a year divided by two 1000. So we'll do that here. We're in M four equals and we could say 30,000 divided by 15 divided by two or just divided by 30 gives us the 1000. The unamortized premium then is going to be equal to the prior unamortized premium minus the amount we amortized this period. And that means the carrying amount then is going to be equal to I'm going to say negative of this 240. I can don't pick this one up on the right. Pick this one up on the left. I'm going to that flips the sign plus the 29,000 and enter. So now we're going to have the 270 went down by the 1000. This will now be the carrying amount or the adding these two up after we record this amortization. If we continue to do this in M five, I'm going to just say this will be the same because it's straight line that 1000. The unamortized premium then is going to be equal to the prior unamortized premium minus the current amortized amount. And then the carrying amount is always going to be equal or negative flipping the sign of this number taking that and flipping the sign plus the 28,000 and enter. Now I'm going to do this all the way down and this should then go down to zero and this should go down to just our 240,000 at the end of 30 time periods 15 years twice a year. I'm going to do this one time with an auto fill and see if it does what we wanted to do. If it doesn't, we'll make any calculations and then see if we can auto fill this all the way down. So if we highlight these items or select them and then put our cursor on auto fill and drag it down one time. We'll see this this does what we want. That looks right. This looks right. This number looks different. So if I look at that, that looks different. So what happened? It brought the 240 down and I don't want that to happen. So I'm going to delete this. I'm going to delete it highlight and delete this and do it again. I'm going to select this and what I want is I want this to move down but not this. So I'm going to make this an absolute reference. You can do that by just putting your cursor between the H and the six and pushing F4 on the keyboard or by adding a dollar sign before the H and a dollar sign before the six just telling it. Don't move it down when we when we copy it down. So I'm going to hit enter and then highlight this whole thing again. Test it one more time. Auto fill down one time and see if it does what we want. This looks right. That looks right. This now looks right. So now we can auto fill all the way down. So I'm going to highlight these cells, put our cursor on auto fill and go all the way down. And then it does what we would expect this now the unamortized going to zero at the end of 30 time periods. And this amount, the carrying amount being 240 equaling the 240 bond amount that will then pay at the end of the 30 year time period. Notice we're jumping of course in time every six months. It's going to be a new year every two period, every two payment types. Okay, so now we're going to go over here and we're going to record the journal entry. Now we're going to record the journal entry for two things that are happening. One, we're making the interest payment. We're actually going to pay cash and two, we're amortizing this amount. We're going to do that as is traditionally the case with one journal entry. So first we'll calculate the interest. We're going to pay asking our first question, is cash effective? It is. We're paying interest. So we're going to say that cash is going to be credited. Let's do that first. We're going to copy it. We'll put that on the bottom in C4 right click and paste 123. Now the amount that we're going to pay is going to be the amount in the contract or 240,000. The face amount times the contract rate, not the market rate. 0.08 in our case, that would be for a year, but they're paid semi-annually. So we'll divide that by two. There's what we'll pay. The other way you can see that, you'll often see someone calculated as 0.08 yearly rate divided by two, six months rate times the 240. Two ways to see that. We're going to do that one more time in E4. I'm going to say negative to flip the sign. 240,000 times 0.08 contract rate divided by two. Okay, so there is that. Now we're going to amortize the premium. So here's the premium. I'm going to copy the premium. Put that in C5 right click and paste 123. Now the question you'll always have is, should I debit or credit the premium? And if you have a trial balance, it's easy because I can see that, okay, that's a credit. I need it to go down. We'll do the opposite thing to it. If you don't have a trial balance, then you got to just know whether that's a debit or credit and then figure out what you got to do to it. One way to think about it is you could say, well, the bond payable is kind of like the sticker price. If you were buying something, you could think of it that way. And if you're talking about something that's at a premium, then it must be higher than that price, meaning we're going to increase it doing the same thing to it as a liability, which is a credit. So this must then be a credit balance if it's a premium. And therefore we do the opposite thing to it to make it go down a debit. In other words, if this is like the sticker price when you're purchasing something, if it were a discount, then this account below, if it were a discount, it would have to be making it go down. It would have to be a contra account, and that would have to be a debit. So however you memorize it, the premium is going to be a credit balance account. A discount is going to be a debit balance account. If we're reducing the premium, a credit balance account, we do the opposite thing to it, a debit. We always do the opposite thing to it, but because this is a credit balance, the opposite thing is a debit. So in D5, I'm going to say this is going to be equal to that 1,000 in our amortization table. Okay, so then the difference is going to go to interest expense. So I'm going to be copying interest expense. Expenses are always going to go up in the debit direction, just like if it was a loan, right-click and paste 1, 2, 3. We're going to record the difference here, the credit minus the debit or 8,600 debit. We'll do that with our sum formula, our plug formula, our negative SUM. Double-click the sum. I would just go from the bottom to the top because that thing is in the way, or you can move this if you want, and enter. There we have it. Note that we are not like in order in terms of debits on top. I built this in whatever way makes the most sense. So that's what I recommend doing. If you want to reorder it, put the two debits on top, then that's okay. If you want to keep it out of order because you think it's better or easier to go back and look at at a later time, I would recommend doing so. Also note that you could break this out into two transactions. You could say we paid cash and debit interest expense, and then separately think about the amortization of the discount, meaning you're going to debit the bond payable and credit interest expense, which could look confusing because then you would credit the interest expense at that point, which is not normal. You don't usually increase or decrease an expense. But the reason you're doing it is because these two things are kind of linked. They are kind of linked together. That's why the one journal entry is typically how you see it done most places. But if it helps to break it out to think through it, then that's fine as well. Okay, so here we go. We're going to post this. Here's the bond interest. Here's the bond interest on our trial balance. Here in I-12 where we're going to say equals and point to that 8600 bringing the balance up to 8600, putting us out of balance, bringing net income down. Then we're going to go to the cash. Here's the cash in I-3. We're going to say equals point to the 9006 bringing the cash down. Then we're going to go to the premium on the bond. And here's the premium. We're going to be in I-7 equals pointing to that 1000 bringing the premium down. Notice no effect on the bond payable because we're not paying any principal off until the end of the bond. So that's what we have. This should match then over here. We've got the 29000 unamortized here. We got the 240 and the 29 giving a carrying amount of 269 matching this amount here. Now we're going to do that. The next one is going to be the same type of transaction just to show us two transactions. I'll highlight this to show us where we will be at on the amortization table. So same thing. We're going to say is cash affected six months later? We're going to pay this. And I know obviously other activity would happen in the trial balance between these points. But we're just going to record it here so you can see the effect on those accounts on the trial balance. In other words, it's six months later. So we obviously there would be other activity in the trial balance happening. We're just here focusing in on these accounts. And we want to see something in balance at the beginning and at the end. So we're going to put this here in C8, right-click and paste 123. Home tab, alignment, increase in denting, same amount, same calculation. Negative 240,000 face amount of bond times the contract rate on the bond divided by two. Then we're going to do the same thing to the bond premium. Reducing it. We're going to do that by putting our cursor in D9 equals. And we're going to hold this number here. The same 1000 from our table. It's not the same 1000, but they're all 1000 because it's a straight line method. And then we're going to say the interest will be up top once again. So same transaction. We're going to use our negative sum equals or negative sum. And then I'm going to go from the bottom to the top or you can move this thing out of the way and enter. Now let's record this out. Here's the bond interest. Here's the bond interest here. We're in the middle column. We're going to double click, go to the end of it. Plus, point to that 8600 bringing the balance up, putting us out of balance, bringing net income down. Then we'll go to cash. Here's cash. Here's cash on the trial balance. We're in I3. Double click, go to the end of it. Plus, point to that 9006 bringing that down. And then here's the bond, the premium on the bond. Here's the premium on the bond. Double click on I7, go to the end of it. Plus, point to that 1000 bringing it down. So as you can see, we're bringing the unamortized amount 28 matches here. And then if we highlight those two, the carrying amount 268 matches 268 here. And that of course will be the case as we go down. This will then go down to zero at the end of 30 time periods leaving us with 240, which will then pay at the end of the bond terms. So just note that the bond payable, the principal amount is not going as we pay interest. We're only paying the rents on the money and reducing the premium.