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Face Value Bonds:Interest Expense and Interest Payable

Brian Krogol
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All right? So as time continues, we're gonna have to keep paying interest. Right? But what's gonna happen before our next interest payment date, right? The next interest payment date is gonna be one january first. Rolls around. Well, we're going to issue our financial statements at the end of the year. On december 31st. Right? But that still means that the six months have gone by right, the other six months of interest have gone by. So we would still calculate it the same. We have the 50,000 in principle times the 60.9, Which gives us the yearly amount of interest, which we had calculated to be 4500 yearly. Right? But we divide that by two To get the six months of interest. Right? So we had already taken six months of interest expense in the previous journal entry in the previous video and now we're gonna take the next six months from July through December. So on December 31, 2018, we're going to make another journal entry for the other 2250. Okay, now this one's a little technical but in general it's it's just good to know how we're making this entry. So on december 31st 2018. Well what are we gonna do? We're gonna take our interest expense. Right, And that was since it's a face value bond, well, we know it was gonna be the 2250, but what's the other side? We haven't paid it in cash yet. We don't pay it in cash until January one the next day. So technically the cash is still in our pocket. So what we have is interest payable. Okay. On december 31st 2018 we have interest payable. We have this extra liability to pay this interest on january 1st. Right? We need to accrue for the six months of interest that have passed since july 1st. So we have to take the 2250 as interest payable. And that's going to be our interest expense as well in this case. Okay. And just to show you on january 1st. So on 11 2019 the very next day when we pay the interest, right? Because on december 31st 2018 we're issuing our financial statements but we haven't paid that cash yet. So we don't want to reduce our cash, it's still in our bank account as of that day, The very next day we pay it off and we're going to debit interest payable because we no longer have this liability for the interest payable and we're going to credit cash right? Because we're paying out in cash and that'll be the 20-50. So notice the difference between this set of entries and what happened in the previous page for our interest expense on July one. Well that was still during the reporting period and we paid it out in cash, we took the interest expense here, we had to create a liability on the last day of the year uh to accrue for those six months and then we paid it off on January 1st. Okay. So nothing too crazy. There were still seeing just our interest expense and just calculating our interest based on our stated interest rate, our principal amount, and then dividing it by two because its semiannual periods. Okay, so our interest expense and our interest payable notice what happens here? Interest payable? That's a liability, right? Because it's a payable And that's 2250. It's an increase in our payables and the interest expense. Well that lowers our equity just like we did in the previous uh journal entry up above. So we stay balanced here. Right? The liabilities increase, the equity decrease were good. And then once we make the next entry, the payable right in that blue entry, the payable decreased by the 2250 And the cash decreased by 2 2250. So that also stayed balanced there. Okay, so that's about it here, let's go ahead and move on to the next journal entry.