 Hello, everyone. Today I'm going to be going over this question that deals with bonds. Specifically, the questions is asking you about what is the carrying value of the bond? This topic is extremely important on the CPA exam. Bonds is a major topic. So if you fail this topic, there's a good chance you may not get 75. So I'm going to go over this question. And by going over these questions, I'm going to tell you how to approach these questions on the exam day. I'm going to try to analyze the answers that I got. I have 286 votes for this question, just to show you how you can answer these type of questions on the exam day. Now, if you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. It shows you how other people use my system, farhatlectures.com, to pass the CPA exam. I don't replace your CPA exam. If you're studying for the CPA exam, you can keep it. But if you go to farhatlectures.com, you can find additional material that's going to help you pass your exam. So if you go to my website, Farhat Lectures, under CPA exam, for example, if you're studying for FAR, you can go under FAR. And you will see many different resources for FAR. My resources are organized to mirror image your course. So if you are taking a Becker course, a Wiley course, a Roger course, you will choose the appropriate course. I have 500 CPA exam questions. I have all the FAR AI CPA questions, as well as other AI CPA questions released as well. I strongly suggest you take a look at my website. If you're interested in investing a little bit more in your career, a little bit more into your CPA exam. What I'm going to do now, I'm going to go ahead and answer this question and show you, based on my explanation, what are the tricks to answer this question? Simply put, if you have, in my opinion, if you have basic understanding of bonds, basic understanding, you should be able to answer this question. So I'm going to go ahead, snip it, and start to work with this question to show you how to answer something like this on the exam day. So on July 1st, Adam Company issues an 8% bond with a face value of half a million. Translation, Adam Company is trying to borrow half a million. They're paying 8%. The bond mature on July 1st, year 11, 10-year bond. The bonds were issued at 93.7 to yield 10%. This is the price of this selling, of selling the bond. The price is a discounted price, why? Because it's less than 100%. 93.7 is obviously less than 100. The bond is sold at a discount. And how do I confirm it's sold at a discount? It's yielding 10. So whoever wants to buy this bond wants to earn 10%. You're offering eight. Therefore, the bond will sell at a discount. So everything makes sense. You want to make sure you know how to read this and be comfortable with it. Interest is payable annually on June 30th. The company uses the effective interest rate method to amortize or discount, to amortize either the discount or the premium. Here I put both discount and premium to confuse you to make sure, I don't want to tell you it's a discount. You should know that it's a discount. I put discount or premium just kind of to confuse you. The question is, what's the carrying value of the bond December 31st, year one? So simply put it was issued in July. So you have July, August, September, October, November and December. You have six months. So you're gonna have to amortize the premium over six months. So let's take a look at the answer choices and see what we have. And I'm gonna analyze those questions based on your answers and tell you which questions you should be able to eliminate basically immediately. Okay, cannot be determined. 6% answer cannot be determined. If you answer these questions, it truly means you don't understand the bonds. Go to my website. I have a whole session about bonds, okay? Also, if you insert 500,000, which is the face value, a six month later, the bond will not equal to face value. The bond equal to face value by the end of its life. Once the bond mature, it will equal to half a million. So if you selected half a million or cannot be determined, I would say you are on the weak end of bonds. So I'm just telling you this for your own good. What we are left with is two options, 468,500 and 471,925. Now, if you answered 468,500, which is 30% answer this, which is approximately not 90, a little bit less than 90, that's a substantial amount of students answered as 468,500. That's a correct answer. So there's something has to do with this. What is that? That's the issue price. If the bond has a half 5 million par value, you issued it at 93.7, you would receive in total 468,500. So these are the proceeds when the bonds were issued. So this is the price of the bond when the bond was issued, but that's not the question. If the question was, what were the proceeds? How much cash did the company receive? Then the answer would be 468,500, or what's the price of the bond and what is the present value of this bond on July 1st? The answer will be 468,500. Therefore, the answer is not 468,500, although it's a right answer. Half a million is the maturity value of the bond, but that's not asking you about this. So by process of elimination without even doing any further computation, you can answer 471,925. So simply put, just by knowing basics, the basics about the bond, you could eliminate half a million. It can be determined. And if you know how to compute the price of the bond, you eliminate this and the answer is 471,925. I'm gonna show you exactly how 471,925, but I wanna make sure you understand that by process of elimination, most questions on the CPA exam can be answered by process of elimination. If you have basic understanding, you could eliminate two choices and you should be down to 50-50. And by a minor computation or minor additional knowledge, you'll be able to answer the question. But it's very important that I go over the computation because you want to know why is it 471,925? So we are using a discount. And what's gonna happen is we're gonna start to amortize the discount. So how much discount are we going to amortize from July 1st till December 31st? We're gonna amortize six month worth of discount. So let's see how much discount do we have? So first we're gonna take half a million minus 468,500. We're gonna find out how much discounts do we have for this bond? So because this is the amount that we're gonna be amortizing. Just kind of, so this is where you are. Now, you understand all the moving puzzles in a problem like this. So we have discount worth of 31,500. This is just for your information, FYI. How much discounts do we have? Well, here's what's gonna happen. The bond pays 8%. So we're gonna take half a million. Six months later, it's gonna pay four because again, we're only computing everything for six month. So if we take half a million multiplied by 0.04, if we're paying cash, we're not paying cash, we will have to credit cash 20,000, although interest is paid annually. So at this point, we will credit interest payable if we are doing the adjusting entry. Maybe I will do the adjusting entry. So this will be interest payable as of December 31st, 2021. Now, so let's do the entry. This is interest, let me just move this a little bit further. So December 31st, interest payable will be 20, let me see if I can move this further. I can't, let me do it down here. So interest payable will be 20,000, 20,000. Now I have to debit my interest expense because I have to debit interest expense by December 31st. Using the effective interest rate method, how do we compute the interest expense? The interest expense is the beginning book value of the bond which is 468, 500 multiplied by the market rate. The bond yield 10%, however, we're computing only for half a year. Therefore I multiply by 5% again because I'm only computing this for half a year. So I'm gonna take 468, 500 times 0.05 is 23,425. 23,425. So that's my interest expense. Let me scroll down here. My interest expense is 23,425. Now the difference between them is the discount and the discount will be 3,425, 3,425. Since I amortize this much of a discount, so what I'm gonna do then, I'm going to take my face, my carrying value, what I started with when I started my carrying value, which is 468, let me just get my pen again. 468, 500 plus 3,425. And that's gonna give me 471,925. Once again, on the exam, a question like this, you don't have to go through the computation as long as you understand this is the price of the bond. Half a million is not an answer. It can be determined what you're left with is this number. And the answer should be more than 60, more than 468, 500 because you amortized some of the discount. So once again, at the end of this recording, I'm gonna remind you whether you are an accounting student or a CPA candidate, especially if you're a CPA candidate, my resources can help you pass the exam. I have resources for all your CPA review courses. I have resources for your accounting courses. Take a look at my material. It will help you prepare for the exam. The CPA is a lifetime investment. Don't shortchange yourself. Take it seriously. Good luck, study hard and of course, stay safe.