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Straight Line Amortization:Bond Discount

Brian Krogol
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Alright now let's do the same thing with the interest expense. But now for the discount example notice we've got the same formula, the amortization is always gonna be that total amount of the premium or the discount divided by the total interest periods. Cool. So let's do that here, notice we have semiannual interest again. Right so that means twice per year. So our cash amount of interest that we're gonna pay, well that's gonna be the 50,000 times .09. And we're gonna divide that by two, right? Because it's for half a year and we'll get the 2250 in interest. Now how about the amortization in this case we had 3000 of total discount divided by the 10 periods, right? We've got five years to interest periods per year. That's 10 total periods. So that's 300 per interest period that we're gonna advertise of our discount. Okay 300 getting advertised per period. So let's go ahead and go straight to our journal entry. We know we're paying cash, right we're going to credit cash for 2250. And we're gonna in this case remember our our discount had a debit balance right? It was lowering the value of our liability with a debit balance. Well to get rid of that debit balance we need credits. So now we need to credit the discount on bonds payable to start getting rid of that debit balance. So this will be a 300 credit to discount on bonds payable and then our debit, we always have interest expense as a debit. And notice this is again our plug. So we need to add the other two numbers right? We found our cash, we found our discount. Well the interest expense is just the sum of the two of them. 2550. So just like we had before cash, we use our formula principle time stated rate. And then we're going to divide by two if its semiannual, right, if its semiannual then we divide by two and the 300. Well that comes from the formula in the box. Right. This number is a plug that balances our equation. So let's go ahead and fill these out. Our cash went down by 2250. Now, what about with the discount we have this credit to the discount? Well this is increasing our liability right before we had the 50,000 and bonds payable and 3000 in the discount. Well we've credited 300 out of the discount. So there's less discount our liabilities are increasing by that 300. Right, So that's less of a discount. So our liability is getting closer to that 50,000 value that originally had and our interest expense. Well that's equity, right, interest expense. And that's for the 2550. And that's a decrease to equity right there. So right behind me, 2550 decreased to equity, right from the interest expense. So we stay balanced here. The left side went down by 2250. The right side went down by 2250. Everything balances here. Alright, so let's go ahead and do a practice problem now related to the straight line method.