 Support Accounting Instruction by clicking the link below, giving you a free 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. 30,000 here, we need to amortize over the life of the bond. So we're basically just going to divide it out by the number of payments and then reduce it at the same time of each payment. And we're going to reduce it to the other side will be interest expense. Why? Because that 30,000 came about because of the difference in the market rate and the rate that was on bond. So let's think about that type of amortization schedule we'll have, which is just going to be straight line amortization. So when we put the bond on the books at one one, we had a 30,000 unamortized discount here and the carrying amount of the bond then was issued at 240,000 minus or plus in this case, the 30,000 and entered. So it was the carrying amount then was the 270, which is of course the 240 and 30. Then after six months, we're going to pay off some interest on 630 and therefore, how much are we going to pay off? Let's take off the calculator here. There's a couple of ways we can calculate it. We're going to say that we have a 30,000 amount that we have to amortize over the life of the bond. We could divide it by the number of years divided by 15 years. Enter that would give us 2000. That's per year. But we're going to do this every six months, so twice a year. So we could then divide it by two and it's going to be 1,000. Next way we can think about it, we can say 30,000. It's 15 years, but we do it twice a year, therefore it's 30 periods that we're talking about. So we could just divide it by 30 and that would give us the same 1,000. So let's do that calculation here. I'm going to say this equals the 30,000 divided by, in this case just 30 periods, 15 years times two basically. And enter that's 1,000. Then what's going to happen to the unamortized premium equals the 30,000 minus the 1,000 that we're going to reduce it by brings it to 29. Then the carrying amount then will be, we can think of it this way, it's going to be the 240,000, which is the face amount of the bond here, plus the 29 and it went down by 1,000 to 269. So after we post this transaction, this journal entry then we would assume that this amount is going to stay the same because we're not paying off any of the principle. This amount is going to go down to 29 and this minus this will be the carrying amount of 269. So therefore what we have to do then is we got to take this premium, we got to reduce it by this $1,000. So this has a credit balance, therefore we're going to do the opposite thing to it, which in this case would be a debit. So I'm going to copy that, I'm going to right click and copy, I'm going to put this over here in C26, right click and paste 1,2,3. And we will debit that amount for $1,000. Okay, so now the interest expense is going to be the difference between those two obviously. So I'm going to do that with the negative sum function. I'm going to say negative sum and we could move this out of the way. You could put it here and move it up here and you could highlight from the bottom up. So it's going to be then 86, 86 plus the $1,000 equals the $9,6. Debits equal the credits. If we highlight all of these cells then the debits minus the credits equals zero. A couple of things to note here, note that I put this on the bottom because it was helpful for me to build the journal entry. But if you're in a picky system that wants the two debits on top, you might have to adjust that and put the two debits on top. It really doesn't matter as long as they're in the right column and they're in the right format in terms of a negative number in this case. But some systems, you're going to need that on top. And also note that this amount is actually kind of reducing the interest expense which can be a little bit confusing and that's because of course we're at a premium. We issued it at a premium in this case rather than a discount. All right, so let's post this out. We're going to say the bond interest expense is here, it's going to be here on the trial balance. We're going to post it to the blue section in I-29. So within I-29 we're going to select equals and point to that 86. It's going to bring this up in the debit direction, put us out of balance, going to bring net income down. So note that the interest expense, just like kind of rent expense, we're renting the money, brought net income down like so. And then we're going to post the cash. So here's the cash here. Here it is on the trial balance, there's something in it. Therefore we're just going to double click on it, go to the end of it and plus. And then post to that cash, 96, that's going to bring the cash down. Then we're going to go to the premium on bond payable. Once again something's in there, so I'm going to double click on it, go to the end of it and plus point to the 1,000 here. That's going to bring this 30,000 down to 29. So now we have the 240 didn't go down because we're not paying any principle off. And we amortized the premium down like so, the carrying amount if we highlight both of them, 269,000, 269,000. Again a lot of people get disturbed by the fact that the principle doesn't go down at all as it does in other types of liabilities like a mortgage or like a car payment. That's just going to be the terms of the note. We're just paying the rent on it. We'll pay the entire 240 at the end of the term being in 15 years in this case. All right, so we're going to do the same type of thing again. We're going to have the 1231 record bond interest in straight line amortization. So on 1231 we will basically do a very similar journal entry here, pretty much the same journal entry here. So, but let's think through it one more time. What we're going to do is cash affected our first question. And yes, cash is affected. It's now all the way out in 1231. We are going to pay the interest once again and cash has a debit balance. We need to make it go down. Therefore, we're going to do the opposite thing to it, which in this case would be a credit. So I'm going to copy the cash, copy the cash. We're going to put that under the date. I'm in cell C29, right click, paste 123. And then how much are we going to credit for? Well, let's pull out the calculator one time and do the calculation with a calculator one more time. And the question being, how much are we going to pay when we calculate it? We take the stuff that's been written in stone, not the market value stuff. We have the face amount, which is already on the bond. It's written on the bond 240,000. And then we're going to multiply it times the rate that is written on the bond, not the market rate, the rate that's on the bond. It's written in stone times 0.08 in this case. That gives us 19-2. Remember that any time we talk about interest, we mean for a year. And then we have to say, well, did we rent it for a year? No, it's only been rented for six out of 12 months. So if we think that's one half, six 12s. So we could think of that in terms of a ratio. I could think of it, let's break it down to a monthly amount divided by 12. Which means that we're paying 1,006 per month times six months. And that will give us the 9,6. I'm going to do that same calculation over here in E29. I'm going to start with a negative to make it a negative number. We're going to have the 240,000 face amount times 0.08 interest. This time I'm just going to divide it by 2 for half a year. Because it's 612ths of a year, one half of a year divided by 2. All right, so there is that. Then, of course, the other side is going to go to bond interest expense. Why? Because it's just like rent in the house. We rented the money, we've got to pay the rent on it. Rent's called interest when we rent money. And we can see that we have a debit balance here. We need to make it go up in the debit direction because expenses always go up. How do we do that? We do the same thing to it, which in this case would be another debit. So I'm going to copy that, I'm going to paste that up top in C28. Right click and paste it 1, 2, 3. Now you would think that we would debit it by the 9.6, but we've got the premium over here that we need to amortize over the life of the bond. And we're going to amortize it using a straight line method. So if we go to our amortization table, as we do this on 12.31, we're going to do the same thing here. So how much are we going to amortize? Well, of course, we're going to amortize the same 1000 because it's a straight line method. But how did we get that? We get the 30,000 divided by 15 years times 2, meaning we have 30 periods divided by 30 is going to give us the 1000 per period. And then what should the unamortized premium be? Well, we have 29. So it's going to equal this 29 that it was before minus the amount that's been amortized for this period, 1000. So we're going to bring it down to 28. And then we can calculate the carrying amount as being the 240 face amount. That's this amount here. And then we're going to add to it the 29,000 gives us a carrying of 268. And of course, we could also calculate that by the 269 minus the 1000 here. All right. So what does that mean? That means that at the end of the day, this is going to stay at 240 after we record this journal entry. This is going to go down to 28, which means that this minus this once we're done will be the 268,000. So that also means that we're going to have to bring down the premium by 1000. So here's the premium. It's at 29. We can see it has a credit balance. We need to bring it down. How do we bring something down? We do the opposite thing to it, which in this case is a debit. So I'm going to copy that right click and copy it. We're going to put that down here in C 30 right click and paste 123 in D 30. We're going to put that $1,000. And now, of course, we have a credit of 96, a debit of 1000 difference is 86. That's what we need up here in the debit. That's what's going to be the bond interest expense. So I'm going to do that with our negative sum formula like so I'm going to move this out of the way because it's always in my way right there, but I could have just highlighted from the bottom up and left it there and it would have been okay too. And that will give us our 86, 86 plus 1000 gives us the 96, which equals our credit. And if we highlight all of them also in balance in that format as well. Okay, so just remember to note that we do, I did put this on the bottom and we don't have our two debits on top. So that could cause problems depending on who's, you know, grading your software. If you're using actual software in practice, it won't be a problem and I highly recommend building your journal entries in such a way that makes the most sense to you. If you had to go back and look at it and be audited on it so you can tell the auditor, Hey, this is what we did. But if you're doing it for software for grading purposes, sometimes they can be really picking in terms of how the format looks. So we're going to post this. Here's bond interest expense. Here's the bond interest expense here. We're going to post this to I 29 something is in it, therefore, I'm going to double click on it. We'll go to the end of it and plus we're going to post this 86 right there. That's going to bring the interest expense up, put us out of balance and bring that income down. So remember net income is the sales in this case revenue minus the expenses and the expense of interest is similar to rent expense. We're renting the money called interest increase in the expense decreasing that income. Then we have the cash here cash is here on the trial balance and we're going to post it to I 20 going to double click on it because something is in it. We're going to go to the end of it and select plus and then we'll point to that 96 and that will bring cash down because we're paying off the interest. Then we're going to post the premium of 1000 here it is the premium here. Here's the premium here. We're going to go to the blue area in I 24 double click go to the end of it and plus and we're going to post that 1000 and enter. So that puts us back in balance. Hopefully you can see the trend that is happening now of course in that there's no change to the bond payable because we're not going to pay that off until the end of the period and that's just the term of the bond after 15 years. The premium will go down by the 1000 and we're going to make it go down in a straight line method by 1000 per period 30 periods because there's 15 years and we pay semi annually twice a year and then of course the expense will be reflected as the difference. The carrying a value in this case is 268,000. It will be at the end of 15 years just 41,240,000 because we will have to amortize of this down to zero thereby leaving us with a 240 that we will have to then pay as of the end of the term of the bond being 15 years in this case.