 In this discussion, we will discuss the discussion question of explain if a journal entry for issuing bonds at a discount and the journal entries for interest and amortization 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 So if we see an essay question like this or a discussion question, and we don't know where to start We can't start by just defining bonds and what what our bonds what does it mean to issue the bond a Bond is usually going to be a way of financing for the company So we're looking to get money for the company and we're going to issue bonds for that in a similar way as getting a loan So the bond then is going to be a promise a promise to repay In accordance with the terms of the bond and the bond will typically promise to repay a face amount So if we had something on the bond here of a thousand dollar bond and they're typically in terms of thousands So we can issue multiple bonds typically in terms of thousands and whatever rate is on the bond Then we're going to say we're going to pay back The one thousand at the end of the bond plus the interest rate over however long the term of the bond is And so that's just what the bond is going to be it's a promise to repay why because we're going to get cash For it's a financing option. So then we can think of well What's the what's going to be the journal entry when we first issue the bond and remember the purpose of the bond for us? The company is to get money. So we're trying to get money. So cash is going to be the purpose So we're going to say cash is affected and cash is going up when we issue the bond We're going now I'm not going to write down the cash yet because we don't know really what it is that we're going to get So what we we're going to bond payable and that's going to be why we're getting the cash kind of like loan payable We owe it back in the future. We know what that is. It's a thousand dollars the amount on the bond And then we got to determine how to get a discount. What does it mean to be a discount? Well, the discount would mean if you're purchasing something and you're saying the sticker price is a thousand If we paid less than a thousand That's what would be a discount typically. So that's the same thing here We're gonna say well, here's the face amounts of thousand if we pay something less than a thousand if we pay say nine hundred Then we're gonna have a discount of one hundred and we can see that if you start to make the journal entry That's gonna have to be a debit. So even if it weren't asking for a journal entry It's it's useful to write out the journal entry even if it's very sloppy even if they don't give you numbers Because that'll tell you things like is it a debit or credit? It'll help your mind to think through this thing. So that's gonna be the discount and There there we have it. So there's our journal entry to basically record. It's very sloppy But there's gonna be our record our journal entry to record The bond to put it on the books now then the question of course is well, how why is this discount there? Why would we want to pay something back at the end? 1000 and have this discount on it Why would they why wouldn't we want one thousand dollars for it? Where does the discount come from and it's difference between the interest rates? So the market rate and the rate stated rate the bond here. This is fixed on the bond We can't change. It's already written. So we got the thousand. We got the ten percent. We can't change that What we can change is how much people pay us for the bond? So that depends on the interest rate on the market Meaning we're trying to sell our bond for a thousand dollars But if someone else on the market saying hey if I give my thousand dollars somewhere else I can get a return at 12% and you're only paying 10% on that bond They're not gonna buy our bond for a thousand dollars because we're not paying as much interest as they could get elsewhere It's like trying to rent an apartment for more than Than other people are renting the exact same type of apartment So we're gonna have to sell it for something less and that's what we're gonna do here That's the thousand dollars that would be a discount if on the other hand, of course The the rate was something less here on the market then the market would go somewhere else They would they would go somewhere else. I can only get six percent I want to buy your bond for a thousand and then we at that point would say well No, we're not gonna sell it for a thousand because we know you can only get six percent somewhere else That would be like selling our our apartment complex to somebody under what other people are selling the exact same Complex for so we would say no we want something more then we would sell it at a premium So the discount or premium you can think of it as just it just means that your Discount means that you're the purchasers buying it for less than the face amount and a premium is buying it more But then you have to link it to these interest rates. The reason is because of these interest rates Okay, and then what we're gonna do is record the interest and The the amortization of the discount You can actually think of those as two separate journal entries if you want although they're usually combined the interest rate To pay the interest what we're gonna do is we're just gonna say we're gonna credit cash And we're gonna debit the interest for whatever we pay What are we gonna pay the face amount of the bond times the interest rate on the bond and then we're going to adjust it for Whatever time period we are looking at if it's a six month bond we'll adjust it for a six month time period So in that case it would be the 1,000 times 10 percent divided by two for six months And then we'll we'll record that so that'll be a debit to interest expense credit to cash And then we can think about the discount. What are we gonna do with this discount? Now remember this discounts really a difference between this these interest rates So what we're gonna do is we're gonna we're gonna make it go to zero by the end of this thing And we're gonna record it to the other side, which is gonna go to interest expense So you could think about that as a separate journal entry and the easiest way to think about it is just if we were to Do a straight line kind of amortization method which isn't the preferred method But that's the easiest way to think through it first So you would just take the 1,000 divided by however many time periods you have Which you know if it's a two-year note and it's semi Semi-yearly payments, there'd be four time periods So we just take that 100 divided by four and then we're just gonna reduce this each time period over four time periods Till it goes to zero if we did that with a straight line method We would just take the 100 divided by the time periods make the journal entry Which if we did it separately would simply be this is a debit balance So we'd have to credit it to make it go away So we would credit it by by whatever we come to on the straight line method and then debit the interest expense So we would be writing it off to interest expense each time period Now the effective method would be the preferred method and that's just gonna be doing the same thing But it's not gonna have an even amount each time because we're trying to it's gonna be similar to us figuring out what the interest would be for like a Loan that's being amortized Uninstallment loan the amount allocated to interest in principle will differ because the the carrying amount will differ So that would be the preferred It's a little bit more complex to calculate, but the end result will be the same Which just means the interest amounts will differ from period to period But we'll end up with the discount being zero So what will the journal entry look like typically will typically combine those two so you probably want to Combine those two and say we'll have a journal entry which will basically be looking like this We're going to say that it's gonna debit interest expense It's gonna credit the discount and then it's gonna credit cash for whatever cash we pay And we're gonna repeat that journal entry for however many time periods there are Until the end the last time period of the bond and at that point of time the discount should be down to zero And we should just be left with the bond The bond payable and then we're just gonna pay off the bond payable Just like if it was a note that was matured we're gonna credit cash for a thousand and we're gonna debit the bond payable