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Discount on Bonds Receivable

Brian Krogol
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Alright, so just like we did with the premium, we're gonna use the same amortization to advertise the discount. So in this case we had a discount of 3000 And it's being advertised over 10 periods, right over 10 periods because it's 55 years to semiannual periods per year. It comes out to 10 interest periods. So that comes out to 300 of amortization. Yeah, Per period. Right? So we're going to get rid of the discount at at $300 per period over the 10 periods and that will get rid of the entire 3000 discount. So this should say revenue, I think yours probably already says revenue. Uh we're gonna make a journal entry here, right? Because we're the ones receiving these bonds, so we're gonna be receiving interest and we're gonna earn interest revenue and we're gonna get rid of this discount. So just like we did before, let's find the cash amount of the revenue that we're cash amount of the interest that we're going to receive. And remember the cash interest is going to be paid on the principle and the stated rate. So we're gonna have 50,000 in principle that's paying 9% interest. Remember when we, when they sold us the bonds, they said, hey, we're paying 9% interest, we know everyone else is paying 10 but we're paying 9 50,000 times 9% is 4500 per year. But we have to divide that by two to get the semiannual, 2250. So that's the amount of cash we're going to receive and we already calculated the premium. Amortization. Excuse me discount amortization right here. So we're ready to make our journal entry, we received cash of 2250 and we're gonna amortize the discount. Remember the discount had a credit balance in this case because we're talking about an asset and the discount is lowering the value of the asset with a credit. So the balance of the asset is a debit minus the credit. So to get rid of the discount which has a credit balance, we need to debit the discount on bonds. And this is where it can get confusing to students because when we're dealing with bonds payable, everything is the opposite and we're dealing with liabilities instead of assets. Okay so in that case the discount would have been a debit balance and we'd get rid of it with credits. So that's where it starts to get confusing. You have to deal with both. But the main thing to think about is when we're dealing with an asset, discounts lower the value of an asset with a credit when we're dealing with a liability, well discounts lower the value of a liability with a debit. Okay, so it's always the opposite balance. When we're talking about a discount. So discount on bonds, we found the amortization to be 300 and then we've got our interest revenue right? So we're always gonna have cash and interest revenue and then we're gonna be advertising the discount or the premium for the last part of the journal entry and our interest revenue is our plug that makes us fit for 2550. So that's our journal entry right there. We received cash of 2250 we advertise the discount which was lowering the value of our assets. So now this increased the value of our asset by 300 and we had interest revenue, Interest revenue which goes to our income statement and increases our net income by 2550. Cool. Alright. So remember the main reason why we're advertising that discount or that premium is because we're gonna receive a different amount than we paid for the bonds originally. Alright. So that's how we deal with held to maturity investments. We're gonna be advertising them and show them at their advertised cost when we when we show our balance sheet. Alright, so let's go ahead and move on to the next video