Issuance of Bonds Journal Entry - Lesson 2 - YouTube

Now, when we talk about the carrying value of the bonds, what is the carrying value of

the bonds?

It is going to be the face of the bonds, net of either premium, or net of discount.

That is called the carrying value of the bonds.

It is also known as your "amortized cost."

Remember earlier, we had bonds payable was a million, and I said the discount was 100,

so this net of this is what, 900.

What do we do every year?

This gets smaller, carrying value gets bigger bigger, bigger, bigger up to a million bucks.

What if it's a premium, then this would be the million, the premium would be the hundred,

this would be the carrying value or amortized cost, a million one, gets smaller, smaller,

smaller to a million.

So, as you amortize out the discount or premium, what is it affecting?

Our interest expense.

So it's amortized out, hitting your interest expense.

So you'll see here it says, "Note, the carrying value of the bonds is bonds payable, net of

the un-amortized discount or premium, not net of BIC."

So, do not net at a bond issue cost.

Now this is an important point too, that I want to show you.

Because earlier, I tried to make it simple, so you could understand the concepts, and

then slowly will get more difficult.

Earlier, I had a million dollar bond, I had a discount of a hundred, and I charge you

900.

Notice, the carrying value is 900, and the cash was 900, okay, great.

But is that always the case?

Not at all.

Let's say I spent $10 of BIC, well then minus BIC, so I really only got 8.90 cash.

The carrying value's still nine, notice it's this net of this, don't net it of BIC.

Okay, that's why I went out of the way to say that, because the BIC is a deferred expense.

You set it up as an asset, and then you amortize it out, credit BIC, debit interest expense.

Credit BIC, debit interest expense.

So we're going to amortize that out, over the life of the bond, the bond issue expense.

But what I want you to realize is the cash doesn't always equal the carrying value.

Okay, so if I got a certain amount of cash, don't forget we're adjusting it, because you

might have accrued interest, which isn't frequently tested, you might have BIC, which many not

be frequently tested as well, because a lot of times, what they want to test you on, is

do you understand how to amortize out?

So when we've been talking about fair value versus amortized cost, what the heck is amortized

cost?

This is now our chance to finally jump in and learn what the heck amortized cost is.

Now, there's two important words, one is called report and one is called record.

Report and record.

Now, what does that mean?

Record, and think about the alphabet, ABCDEFG, HIJKLMNOP.

So, record, report.

All right, now ABCDEFOP.

Record, C comes before P. What is record mean?

Record means, how much is the bond payable, recorded in my credited, a million dollars.

How is it reported in my balance sheet?

It's reported net of 900.

So, in-- And I've seen questions like this, where they've asked you how much is bonds

payable recorded for?

The answer is a million.

How much is bonds payable reported in the financial statements at?

Net of discount of premium, 900.

So, CP, ABCDEFLMNOP.

All right, if your kids are listening, that's the alphabet.

ABCDEFGHIJKLMNOP.

Record versus report, important to understand it.

Now, both the bond payable and the unamortized discounted premium, are considered non-current.

So, as you look in the liability section, you�re going to have these both together,

because it's going to be bonds net of, unamortized discount of premium 900, that would be called

a non-current liability, because they're doing five years, four years, three years, two years,

then they're current, because they're due this year.

But, up until that point, they're non-current.

So you'll see again, the terms accrued interest payable, you'll see the terms bond issue cost.

Now, we finally learned, okay, let's set this thing up.

We have it in our books, what's going to happen now?

Now's our chance to learn the effective interest table.

If you look in your notes, you'll see a paragraph that says, "As mentioned earlier."

As mentioned earlier, it's a little more-- What's this, Thai iced tea?

Because it's time for some Thai iced tea, yummy, yummy, mm-hmm.

It says, "As mentioned earlier, the discounted premium may be amortized over the time period

that the bonds are outstanding, using the straight line method, not GAP.

Or the effective interest method, which is called the interest method."

So you'll see effective interest, or interest method.

"The effective interest method is preferred, and is GAP.

Straight line method may be used only if it is not materially different, from the effective

interest method."

So, for our purposes, have there been questions where they ask about straight line, sure.

But generally, what does GAP say?

Effective interest method.

Now, which one is more difficult?

Effective interest method.

Which one are you going to see on your exam?

Effective interest method.

Right, because they want you to just sweat a little bit, they want to make sure you've

earned your CPA certificate.

So that's why we're going to learn the effective interest method.

Now, you'll see in your notes, and you'll see here we have discounted amortization,

and it says, "Face, discount, carrying value, effective interest, interest expense, cash

payment," and then finally, "amortization."

So those are the different elements that you're going to see, in our effective interest table.

So, as we go through this, we're going to have the face, plus or minus discount or premium,

equals carrying value.

We're going to multiply that times our interest.

We're going to take out our cash payment, the difference is your amortization.

And this is kind of a table that you can use for notes receivable, notes payable, bonds,

and then the next section, leases.

And I like to cover leases after bonds, because they use this similar concept, of the effective

interest method, therefore you need to go through and understand that.