 as Professor Farhat in which I'm going to take a look at this CPA exam questions that was sent by one of my subscribers and she she wanted me to share my wisdom basically with that question. I believe the question is very interesting because it covers the terminology of the bound so it's very important to understand the terminology. So this is once you understand the terminology you will see that this problem is not as bad but it's a little bit tricky. So let's go ahead and take a look at this problem and there are more than one way to solve this problem. I'm going to show you the shortcut and the long way in the medium way. So I'm going to show you few ways to solve this problem because the reason I'm going to show you more than one way because when you want when you go into the exam you want to understand all three ways. You want to understand this bond terminology very much okay. On January 2nd, Vole issued bonds with a face value of 480,000 at a discount to yield 10%. So this is what we know from this statement. From this statement we did the following the company debited cash credited bonds payable bonds payable 480,000. Now we don't know the cash amount we're not giving this information and we know it's a discount therefore we debited a discount. Okay that's all what we know from this information that's all what we know. Obviously the cash amount has to be less than 480 because it was a discount bond. Hopefully you know this much. The bonds pay interest semi-annually that's helpful. On June 30th which is after six months the company paid interest of 14,400. Excellent so what did we do on this was January 1st this was I'm sorry January 2nd. June 30th, June 30th I paid interest of 14,400. They told me here I paid interest therefore I credited cash 14,400. Well if I paid interest I'm going to have to debit interest expense. I don't know I'm not told interest expense but I'm told after all recorded amortization of the bond discount of 3,600 the bond has a carrying amount of 363,600. So I'm told here that I amortized 3,600 so this was the I credited the discount 3,600. Well now I know my interest expense is those two together which is the amount of cash I paid plus the amount plus the amount I'm amortizing as a discount. Now if you don't understand what a discount is please that's where far-hat lectures will come into place and help you understand that a discount is basically it's a prepaid interest but you don't recognize it until times goes by. So times going by now you recognize it as interest expense. So you paid 14,400 in cash you amortized 3,600 in discount on bonds therefore your interest expense is 18,000. So I'm doing this as I'm going through this problem. And we know that the carrying value of the amount after the first payment is 363,600. What amount did Vohl receive upon issuing of the bond? So the question is this one here what amount did they receive when they issued the bond? Now first of all once you understand it's a discount bond once you understand it's a face value of 480 the face value of 480 it means it was issued less than 480. So immediately I could eliminate D it cannot be issued at 480 because they told me in the problem it's issued at a discount. I could eliminate C because C is sorry I cannot eliminate C I'm going to have to keep C I'm going to have to keep the rest for now I'm going to have to keep the rest because they're all below 180. Now how can I find out what was the issue price? Well let me show you the long way then the short way the long way and the short way. So the long way is if I came up with interest expense of 18,000 this is like the long way well how do I compute interest expense because I'm giving this information I'm giving this information therefore I figure out interest expense. Interest expense is the bond carrying value at the beginning of the period times the discount rate or the interest rate or the market rate well I don't know what I started with I don't know the book value of the bond at the beginning of the period but the book value of the bond at the beginning of the period should equal to the cash because it's a brand new bond so we did not we don't have any discount to deduct from the phase value okay remember the book value is the same as the cash as of January 2nd okay because the book value equal to the bonds payable 480 minus any an amortized discount minus the discount so the book value as of January 2nd is the cash amount that's why I can use the cash amount therefore I'm going to take the book value which is equal to the cash amount and this circumstances times 10% divided by 2 why 10% divided by 2 because my market ongoing rate is 10% it's semi-annually divided by 2 is 5% therefore I'm going to take my cash amount which is that's what I'm looking for times 10% divided by 2 I'm going to make this 5% which is the interest semi-annually gave me 18,000 of interest gave me 18,000 an interest all what I have to do now is take take to find the cash amount to find the cash amount I'm going to take 18,000 and divided by 0.05 and my cash amount is 360 therefore if I solve this formula my cash amount equal to 360 and that's my answer that's my cash answer which is 360,000 okay now I know the discount the discount must have been 120 so you could be you could be asked about the discount so that's why I sold this problem show you all the bits and pieces it's like a puzzle this problem that's why I like it it's like a puzzle and that's why I want not only share it with the students I want to share it with everyone because it's a puzzle and hopefully you are following now this is the long way on the exam you don't want to do this on the exam you really want to understand how bonds work and if you don't for hot lectures look right here right right right on the in the screen right here go to my website for hot lectures and here's what you do you are told after the first payment here's the key here's the piece of information that you are giving you are told after the first payment the book value is 363 well what happened to a bond if it's a discount bond which is we are told that's a discount bond well if it's a discount bond if the face value we are told the face value is 480 therefore when it was issued it was issued below the face value and whatever amount it was issued for well if we know we discounted which is also given to you 3600 so you're going to take the amount that was issued for plus 3600 and that's going to bring you to 363 guess what well it means it was issued if I have to go backward it means it was issued it was issued at 360,000 because 360 if i am if i amortized 3600 as i'm told in the problem the new book value becomes 360 3600 now the next next time i pay interest i'm going to amortize more discount it will go up and the bond will keep on going up until it reaches 480,000 so this is the shortcut this is the shortcut right here it was issued below 480 i added to it 3600 it became 363 i'm giving all this information so how much was it issued for 360 again in this problem i could have asked you what's what's what was the interest expense for example you know what was the interest expense well you will take how much i amortized plus plus how much i paid i can ask you find the total discount what was the total discount for the bond which is kind of kind of going this way too you can find the total discount of the bond so that you could be asked many problems that's that's why that's that's the difficulty in bonds you really have to understand bonds that's the difficulty in bonds why because you have the look look how many pieces are we working with here how many pieces you are working with the carrying value and the carrying value could be for a premium bond could be for a discount bond so that's those are two difficulties you have to understand what the face value is you have to understand what discount yield is you have to understand how to compute the cash paid for bond interest expense you have to understand the amortization whether it's a bond discount or a bond premium so there are many moving pieces once you understand them they make sense but if you don't have a good grip on them they're gonna overwhelm you at the end of this recording i'm gonna i'm gonna remind you about farhatlectures.com please check it out and if not for anything check out my website to find out how well or not well your university is doing on the CPA exam that's a good indication how well is your accounting program in my opinion at least and look i don't replace your Wiley, Roger, Becker, Gleim or any other course all what i can do is i explain the material a little bit better for you study hard good luck and most importantly stay safe