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Discount on Bonds Receivable

Brian Krogol
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Alright, let's see the same example. But for a discount on january 1st 2018 abc company purchases 50,000 of 9% bonds maturing in five years. The interest is payable semiannually. So no notice nothing has changed here except that the market rate is now 10% right? The market rate is 10% when the bonds self have a stated rate of 9%. So this causes it to be sold at a discount. Right? We're saying, Hey, buy these bonds that are 9% when everyone else on the market is selling 10%. So me as an investor is thinking you're only paying 9% interest. Well, you're gonna have to give me a discount if you want me to buy that. Everyone else is paying 10% interest. So they're gonna be issued at 94. They're gonna have to tell you some sort of issue price like that. Okay, so how do we figure out what the cash amount is? How much did we actually purchase it for? It's gonna be the 50,000 times 94%. That 94 is just a percentage. So 0.94. So let's find out what that comes out to be 50,000 times 0.94. It equals 47,000. So that's the amount of cash we paid for this investment. Okay, so notice what we do here and how similar it is to the other journal entry. Our cash is still credit because we paid for this in cash, give it some space And we're still gonna have bonds receivable, right? We have this asset for bonds receivable and we put the entire amount of the principal balance, the whole 50,000 principal goes into the bonds receivable account 50,000 right here. Okay. But now we're gonna have the discount. The discount on bonds has to has to uh Make this entry balance with a credit of 3000. So notice everything balances out at at 50,000 debits 50,000 credits and were balanced at at a value uh for for the bonds notice these bonds discount, it's lowering the value of the bonds down to 47,000, which is the amount of cash we paid. But in five years when this matures we're not gonna receive 47,000, we're gonna receive 50,000. The amount of principle. That's why we keep that amount in the bonds receivable account and then we're going to advertise the discount over the life of the bond so that it's gone by the time that we receive the principal. Cool. Alright. So let's see that amortization and the interest revenue in the next year.