 Hello and welcome to the session in which we would look at the CPA exam question or CPA exam simulation that deals with bonds payable. This could be a simulation or a CPA exam multiple choice question and the reason is this. I can give you this information in form of documents, in form of emails, in form of communication or I can give you this question giving you four answer choices. Now I'm going to show you if this was giving in a form of a multiple choice as long as you know the basics it should take you 10 seconds to answer this question as a multiple choice. If this was given to you in a form of a simulation you might have to know the journal entries in order to answer the question or journalize what's giving. So first I'm going to work this problem assuming it's a simulation show you the theoretical concept the journal entries behind everything to come up with the answer that I'm going to show you if it if this is a multiple choice it should take you 10 seconds on the exam day to select the right answer choice. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Myles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures multiple choice questions through false questions as well as exercises. Go ahead start your free trial today no obligation no credit card required. Let's go ahead and get started the question is how much did Noah receive upon initially selling the bonds. On January 2nd Noah issued bonds with a face value of 480,000. The bond pays interest semi-annually. On June 30th Noah paid bond interest of 14,400 and recorded interest expense of 18,000. Let's stop right here. Here's what we know so far. On January 2nd we issued a bond for 480,000 that's all what we know. We also know on June 30th we made the cash payment which is six months later of 14,400 and we recorded interest expense of 18,000 because we are told interest expense here. Now what do we know about the bond? Here's what we know so far about the bond. This bond we are dealing with a discount bond. How did I know this? Well I know that I recorded of expense more than what I paid in cash. When does that happen? That happens when the bond was issued at a discount. This is this much I know so without even reading the last statement after the interest payment of June 30th the bond had a carrying value of 363,600. Now this confirms to me that indeed the bond was issued at a discount because the carrying value of the bond is 363,600 which is below the face value. A carrying value below the face value tells you you are dealing with a discount bond and what's going to happen to this discount bond for example if this is the face value of the bond 480,000 if this is a discount bond it's starting at some amount and it's going to go up. Now we know six months later the value is 363,600 and the question is how much was the bond was issued initially. Well initially means six months earlier. Six months earlier is must be less than 363,600. Well do I know this amount? Sure I do. All what I have to do is figure out since I know it's a discount bond how much was the discount amortized for June 30th. How much was the discount was amortized? Well if I paid 14,400 I recorded interest of 18,000 what does that mean? It means of the 18,000 14,400 is actual cash. The remaining is the discount amount of the discount portion of the interest which is 3,600. Well what does that mean? It means my bond carrying value prior to this payment if it's the day which is six months later 363,600. Six months earlier I have to take out the 3600 it means my bond carrying value was 360. What does that mean? It means six months earlier the bond carrying value was 360 and six months earlier this is when I issued the bond. It means I received cash of 360 and the discount of the bond was 100 and must be 120,000. So this bond was issued at 360. How did I know this? Well because my carrying value was 363 six months later it means six months earlier I have to remove the discount I'll figure out that my bond carrying value was 360 it means my total discount was 120. So the carrying value when if you are asked about the carrying value of the one the bond was issued it's 480 which is the face value minus any an amortized premium. So January 2nd January 2nd January 2nd my book value or carrying value was 360. Six months later I'm told 363,600 means I amortized 3600 that's why that's why it went up then another six months later it goes up further by the amount amortized. Now this is the way to solve it the long way assuming you are giving this as a simulation where you have to figure out the answer yourself or you have to record the journal entries. How about if this question was given to you in a multiple choice and a multiple choice again it will take you 10 seconds to answer this question. How? Well here's what I know based on the information giving I'm dealing with a discount bond and I'm I'm told what's the how much it was sold for well it cannot be sold for the face value a discount bond is sold less than the face value that's one two here I'm giving C. C is 476,400 well C how do I compute C? C is taking the bond carrying value which is 480,000 minus the discount 3,600 so if I end up knowing the discount if I real quick said well if I said the difference between 1800 18,000 and 14,400 is 3,600 if I take 480 minus 3,600 it will give me 476,400 yes the answer is there but that that doesn't mean anything all what I did is I took the bond face value minus what I discounted that's not how you figure out how much the bond was sold for okay so that cannot be the answer it's a tricky answer now if I'm between A and D well let's think about it if the bond carrying value is 363 today so remember at January 2nd we don't know the bond carrying value that's unknown I'm gonna say X six months later which is I'm told it's 363,600 okay and maybe another six month later it's gonna be at some number more than 363,600 so it cannot be more than 363,600 which I eliminate C it cannot be more than that therefore what what I'm left with is 360 and on the exam day this is what I would do I will take out B immediately I would see that if I take the difference in discount I'd say that what they did is they took the face value minus the discount that's not how much I sold it for initially assuming I know how bonds work well 366,400 it cannot be because the bond carrying value six months later was higher it means it must be lower six months earlier so the only amount is 360 matter of fact without doing anything if the carrying value is 363,600 so six months earlier it must be a number below that and that's 360 so that's even five second answer assuming I am comfortable with my bonds now how can you be comfortable with your bonds go to four-hat lectures look at additional lectures mcq's true false that's gonna help you understand understand bonds inside out then you are ready to answer questions like these on the cpa exam in five to ten seconds at the beginning this question looks it needs a lot of computation in reality five to ten seconds max if it's a simulation you should be lucky because four-hat lectures approaches everything through journal entries what should you do now study hard prepared whether you are studying for the cpa cma or accounting student good luck and study hard