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Discount Bonds:Interest Expense, Amortization, and Interest Payable

Brian Krogol
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Alright, so just like we had in the Face Valley bonds, we're going to be creating an interest payable in this entry, right? Because now we've reached december 31st 2018 and it's time to release our financial statements. We want to show our balance sheet, we want to show our income statement and we're going to do that as of december 31st 2018. So we need to take those six more months of interest this year. So just like before we're gonna have the same cash interest and we're going to calculate it In the same way the 50,000 times the 9% that the bonds say that they pay and we divided by two because its semiannual periods. And that's gonna give us the same cash interest of 2250. Right? And just like before we already calculated that the discount is going to be uh advertised over the 10 periods, right? We had the 3000 discount divided by the 10 payment periods. We have five years with two payment periods each year, 10 total interest payments that came out to 300 per period. Right? So it's the same calculations we did in the last video they carry on here. That's why the straight line method is so easy because we're just gonna be doing 300 per period of this discount. Amortization. Okay, so we've got the cash, we've got the discount. Now the only difference is that actually when I say cash, we're not paying it in cash on december 31st, right? We're gonna be paying it on january 1st of the following year. So this is technically our interest payable that we have as of two as of december 31st is the 2250. So our journal entry is going to look very very similar except instead of cash we're gonna have interest payable on this one. So we know that we're gonna be paying interest tomorrow on january 1st, We're gonna be paying interest of 2250. So we have this liability To pay $2,250 for the six months that have passed. We're also going to credit the discount again. The discount on bonds payable, it's gonna keep decreasing here. Right, another 300 being decreased. And let's go ahead and look at that T-account over here the discount. So remember it started with a $3,000 balance and then we took 300 in our first interest payment. Now another 300. Well now we're sitting at a 2400 debit balance. Right? And just like we saw before that's gonna keep increasing the value of the liability, write the bonds payable, the carrying amount on our balance sheet. It's gonna keep increasing up to that $50,000 par value that we're going to end up paying off on the maturity date. Okay so these are our credits, we have our interest payable that we're gonna pay off tomorrow and then we have the discount that we have to advertise over the 10 periods. And finally we have interest expense. So notice how similar this is to the journal entry we just made above except instead of cash we have interest payable 2550 right there. Okay so our interest payable. This is a liability in this case, right interest payable because we're gonna pay it off tomorrow and that's increasing our liabilities. Same thing with the discount as we get rid of this. This discount balance. It's gonna keep increasing our liabilities up to that par value for the for the bonds and the interest expense. Well that's decreasing our equity because this is an expense on our income statement and that's decreasing our equity by 2550. So everything stays balanced here. This entry is not very different from the previous entry we made. The main difference here is that we have interest payable because we haven't paid it yet till january 1st. Obviously on january 1st 2019. So the next day we're gonna make an entry to debit interest payable And credit cash. Right? Because we're actually gonna make that payment and that's gonna be in the amount of 2250. Right, Okay. And that's very similar to what we saw in face value bonds. We're going to pay off the cash and get rid of the liability for interest payable. Okay so that's about it for this entry very similar to the entry we made on the previous page. Let's go ahead and see what happens when we repay the principal.