 I'll come to the session in which we would look at a bonds payable issuance, a topic that's covered on the CPA exam as well as intermediate accounting. Now, this topic is important because bonds is a critical component of the CPA exam. So if you're not comfortable with the topics of bonds, you should not sit for the CPA exam. Specifically, this exercise, I would say considered an advanced exercise in a sense that you're gonna be dealing with accrued interests and you're gonna be dealing with the bond issued other than the issuance date. So you have many issues that deal with in this problem. So if you understand this problem, that's great. If not, you need to go back and learn your basics about bond because you cannot go into the exam without having a strong foundation. Like this exercise is more than a basic, but if you feel you're totally confused, then you have to go back and review bond basics. 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Connect with me on Instagram, Facebook, Twitter, and Reddit. So let's take a look at this exercise Madam issued 800,006% bond at 97.5 plus accrued interest on August 1st, 2001. That's fine. This is when we issued the bond. August 1st, 800,000 is the face value. It's paying 6%. It was issued at 97.5. Obviously it was issued at a discount and we issued it plus accrued interest. Once we say accrued interest, it means the bond was not issued when it's initial date. What does that mean? Let's read further. The bonds are, not AER, nine-year bonds dated December 1st, 2010. So they were dated. The original date of the bond was December 1st, but we did not issue them until August 1st. So simply put, if this is year one and this is year two, this is when they were actually, if you look at the bond itself, it's dated December 1st. Let's make it year zero. And let's make this year one to be consistent. It was not issued until August 1st. So notice there is December, January, February, March, April, May, June and July. One, two, three, four, five, six, seven, eight. There was eight month between the date is what it was dated and the date it was issued. So that's the first thing. That's why we might have to deal with some accrued interests. It paid interest on June 1st and December 31st. Now this is important, although it was not issued until that time, that's fine, but it pays interest on December and on June. What does that mean? It means we are gonna be assuming that all the accrued interests was made, was prepared. Now, the company uses the straight line method for bond amortization and calendar year as physical year. That's fine, their calendar year is the same as their physical year, which is December 31st. First, they want us to prepare the journal entry on August 1st when it was issued. So the journal entry here. Well, let's take a look at it. How much did we sell the bond for? Well, we sell the bond. Let me get the calculator here. First, let's start with the cash. So 800,000 times 0.975, and that's gonna give us 780,000. That's for the bond itself. So let's see. So let me write this down. Let me actually, I'm gonna keep the calculator up and write things down to show you how we're gonna get to the cash amount. There we go, okay. So we took 800,000 times 0.975, and we got, let me do it again, times 975, we got 780,000. That's for the bond itself. That's for the bond itself. Now, what does that mean? If this is the bond, this is the bond itself, it means we have a discount equal to 20,000. The discount is equal to 20,000, because what is the discount? The discount is the difference between the face value and how much cash we received for the bond. In addition to the bond, we received, notice in the problem, it says you received accrued interest. Now you have to be careful. The problem might say the 0.975 include the interest or it doesn't include the interest. Usually it does not include the interest. So you have to compute the interest separately. Now how do we compute the interest? Well, we're gonna compute the interest only for two months because we're gonna be assuming that the company was accruing the interest on this bond as time goes by because it was dated December 1st. So let me use a different color. So we're gonna accrue interest for, from this is June, June 1st, we're gonna accrue the interest for all of June and all of July. In other words, we're gonna have 800,000 times, 6% times two divided by 12. So let's do it here. So two divided by 12 times, let me reset here. Two divided by 12 times 0.06 times 800,000. And that's an additional 8,000 of accrued interest. So we're gonna be receiving the price of the bond, 780 plus 8,000 of accrued interest. Therefore cash is 788,000. Remember of this amount, 780 is the bond itself and 8,000 is the accrued interest since June, so June and July. Now the bond will always be credited for the face value 800,000. We're gonna record the discount, which is 20,000. The difference between 780 and the face value 800,000. And we have to have interest expense credit of 8,000. Now whether you do interest expense or interest payable, that's fine, but usually you credit interest expense. Credit interest expense, why? Because we are basically holding the bond. We are basically holding the bond. So really we're not gonna charge ourselves. Therefore we credit interest expense. So this is the entry that takes place on August 1st. Now from August 1st till December 1st, remember from August 1st till December 1st, we're gonna make the first interest payment. Remember the bond pays interest on December 1st. This is when it pays interest, okay? So what's gonna happen is this, we're gonna have six month, not six month, yeah, six month worth of interest in terms of cash payment. So let's start with the cash amount. Well first, the cash amount. The cash amount is 800,000 because this is the easy part times 6%. And that's equal to 24,000. This is the cash amount. Now remember this bond is a discount bond. So now we're gonna have to amortize some of the discount and record the interest expense. We know the cash is 24,000 and we know that the interest expense, it's gonna be more than the cash. Why? Because this bond is a discount bond and what are we going to do? We're gonna take this discount and amortize it over the life of the bond and we're gonna add portion of that amortization to the cash that we paid. Let me explain, okay? First, we're using the straight line method. This is a nine year bond, nine times 12. The total number of month is 108. Now, remember we did not issue this bond until eight month later. So we don't start the amortization until we actually issue the bond. So think about it, from December 1st, year zero till August 1st, year one, eight month is went by. So we're gonna take 108 minus eight. So we're gonna be amortizing the bond over 100 month. Why? Because we don't start the amortization until we issue the bond. Therefore, we're gonna take 20,000 divided by 100 month. In other words, we're gonna amortize $200 per month. $200 per month over the life of this bond. Now, we're gonna amortize August, all of August, September, October and November and all of November because we pay on December 1st. So we're gonna amortize over four month. Therefore, we're gonna amortize $800. Therefore, the interest expense, so the discount amortize is 800. Therefore, the interest expense is the cash plus the cash plus the discount, the interest expense is 24,800. So this is how we amortize, this is how much we amortize of the bond. Now, they also ask us to prepare the entry on December 1st, December 1st, which is the end of the year. Well, from December 1st till December 31st, we only have to deal with one month. What does that mean? It means we have to, everything that we did here, we have to do everything that we did in this entry here, we have to do for one month. What does that mean? It means if we're gonna take 800,000 times 6% times 112. So let's do that. So this is the amount of the supposedly the cash, but we're not gonna be paying cash. So let's start with the fraction. So we're gonna take one divided by 12 times 0.06 times 800,000. So that's gonna be $4,000 and that's going to be the interest payable because we're not paying the money. We're not paying the money, okay? Otherwise that would have been the cash amount, but we're not paying the money. So interest payable is 4,000. Now the same thing, we have to amortize the discount for one month and we already know for one month equal to $200. We just did it earlier. Then bond interest expense is the total of those two, which is 4,200 is the bond interest expense. And this is the amount that we accrue on December 31st. So what does this entry represent? It represent the accrual for one month worth of interest. What does December 1st represent? December 1st represent the payment of six month worth of interest, which involved the full payment of 24,000. So this is basically those are the three journal entries that you need to be familiar with and you need to be comfortable with these journal entries as you go through the exam day. Why? Because bond is a major topic on the exam. So if you're not comfortable with this topic and you get to the exam, what's gonna happen is the AICPA software, I can assure you, they will know that you are not comfortable with this major topic. And if you're not comfortable with this topic and maybe another major topic, you'll be heading toward a score below 75%, which is not good. At the end of this recording, once again, I'm gonna invite you to take a look at my website, farhatlectures.com, where I have resources for your CPA review course. Again, I don't replace your CPA review course. I provide to you alternative resources, explanation, exercises that's gonna help you understand and strengthen your ability to pass the exam. Study hard for the exam, it's worth it. Studying for the CPA exam is worth it. You do this once in your lifetime. Don't shortchange yourself. Good luck, study hard and of course, stay safe.