 ## Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

11. Long Term Liabilities

# Straight Line Amortization of Bond Premium or Discount

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## Straight Line Amortization:Bond Discount 2m
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So when we issue the bonds were always gonna have our issuance entry where we receive cash and we make our bonds payable and we're either gonna have a discount or premium depending on the stated rate and the market rate. Okay, so let's go ahead and check it out in this case. On january 1st 2018. Abc company issued 50,000 of 9% bonds maturing in five years. So this 9% that's our stated rate on these bonds. Interest is payable semiannually january 1st and july 1st, the market rate is equal to 10%. This is the market rate on these bonds. Right? And notice the stated rate is less than the market rate. So our bonds are only paying 9% when the market is paying 10, they're going to sell at a discount and we can tell it's a discount because they're issued at 90 for right, 94% Of their \$50,000 value. So the cash we receive is going to be equal to the 50,000 Times 94%, which is .94. So let's see what that comes out to 50,000 times .94. That equals 47,000. Okay, so that's the amount of cash we're gonna receive. But that's not what the amount we pay back when these mature. Right? We're gonna have to pay back the full 50,000. So we're gonna debit cash here because we received cash of 47,000. We're gonna credit bonds payable Now, how much is the bonds payable amount? You guys should have this down by now. Right, we're gonna put the entire 50,000 into bonds payable here. Cool. So we credit bonds payable. This liability for 50,000. Well, we need 3000 more in debits. And guess what? That's our discount on bonds payable notice in this case. Since we have a discount, we have a debit here and it's lowering the value of our liability. Where with the premium it was increasing the value of our liability. So let's see how that works here. The cash went up by 47,000. But notice what happens with our liabilities? We had bonds payable for 50,000. Right? But then we have less the discount because this is a debit, right? We have a credit in bonds payable and a debit in the discount. Well, the discount is gonna lower this value by that 3000 Leaving us with 47,000 in our liabilities there. That's the increase. Cool. Let's pause here. And then we'll deal with the interest expense
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## Straight Line Amortization:Bond Discount 3m
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