Issuance of Bonds Journal Entry – Lesson 1

Issuance of Bonds Journal Entry – Lesson 1


Okay now hopefully bonds are starting to make a little bit of sense. Let’s continue on you’ll see here journal entry issuance
and we’re talking big and accrued interest so what I’m
gonna do them to get the permit anything and everything they ever test you on they don’t use the test this much in it
but I’m gonna give it all to you just so we’re having a good time now as we go through this are certain
things that fall into our journal entry and here’s what we’re gonna look at and
I’m gonna make it like a one two three four and then we’ll go through the details so
here’s what our journal entry will basically look like will have a war on tune to 3G for our bomb I’ve or 5 mmm barry tasting now morning by for senior credit bonds
payable and that’s because you always know what
bond payable is hit bonds payable for the face amount
the second thing we may have is called accrued interest payable and this is
something that is not tested on every exam but it does
periodically show up so this is gonna be an amount for
accrued interest that we’re gonna have that we may end up needing in order to figure out what is are a
cutie accrued interest and this is for interest that occurs
between interest dates so what that means is
let’s see how I’m gonna pay you interest but the problem is a certain
amount of time is already gone by so here for example is the time right
here’s our time and let’s say for example we are looking
at you know if you bought the bond on
January 1st and at December 31st I’m gonna owe you what I’m an OU 1212 to
the year okay not a problem said the end I owe
you what a million eight-percent eighty grand some 200 you eighty thousand bucks but
let’s say you bought it here on April 1st April Fools Day april fools
a low April polls so how much time has gone by January and you’re allowed to bring your
fingers to the exam January February March 31st three months so there’s nine months lap
some now at the end of the year you’re gonna
still pay me how much you’re still gonna pay me eighty thousand bucks wide because it’s
way too much work at the end of the year to go okay you by JR who’s your eighty you bought
it when April 1st at three quarters here’s your sixty you but when till I first that happy
year here’s forty way too much work so here’s what I’ll do
instead all Jack that accrued interest into the purchase
price and then at the end of the year I can just give everybody 80 80 80 80 80 80 80 I’ll so with accrued
interest what all say as you’re buying it here how much time is
already been accrued 3 12’s or one corner so I’m gonna say Okur me a quarter a baby or 20 bucks
then at the end I’m gonna pay you eighty what did you really earned you’ve
really earned eighty minus the twenty you burn 60
which is from here to here make sense let’s say you buy it on July
1st then happy years gone by all charge you
40 at the end I pay you 80 what did you
aren’t 40 cell for me I’m gonna get that money up
front let’s just say it was whatever 60 bucks
so I would credit accrued interest payable 60 because that the liability but I’m also gonna have some cash and
that cash would go right here as sixty so I basically get a
cash credit accrued interest payable then at
the end of the year accrued interest payable and I’ll give you the 80 bucks somebody
give you 80 the accrued interest payable sixty a bit was money that you paid me up front see you really
only earning whatever the difference is 20 bucks so my real interest expense is only 29 E
why because 68 you prepaid so again that’s called accrued interest
payable that’s what we’re looking at as far as the amounts so again I want you to kind understand
the accrued interest payable as far as what the amount is how it fits
in and how it all ties together so that’s a really important concept as
far as accrued interest payable then what we’re gonna have a debit cash
now the deputy cash that’s gonna be either for what we call
the present value remember way over here well we calculated the present value of
nine hundred and twenty four thousand 280 so that would be either the present
value or remember I said they say the bonds were
issued 101 or 98 101 percent 98 so whatever that is that
so much cash on a charge you so I’m gonna put here percent I’m face
or your present value calculation plus on an ad in the accrued interest which
you just paid me up front mine is something called the BIC and
this big is called bond issue cost that I’m gonna
set up as basically a deferred charges charge basically it’s a tougher charred
or its gonna be in a sense a non-current assets and an
expense that i’m gonna amortize over the life of the bonds and with your
bond issue cost if you turn the page you’ll see it talks about accrued
interest payable on to give you an example there’s you can kinda play with
at work through it I also include bond issue costs bic but bond issue cost you gonna take these
and you’re gonna amortize them straight-line over the period that the
bonds are outstanding so the period that the bonds are
outstanding now this is important let’s say they’re
five-year bond how many months is five years five times 1260 but let’s say I don’t issue the bonds
for three months how long the bonds outstanding sixty -3 57 I would then amortize them over fifty
seven months so it’s the period at the Montreux
outstanding what is included in there if they ever ask you it’s usually d all
of the above but what’s included printing in grading legal accounting underwriter commissions promotion costs like printing the
perspectives to get people to buy the bonds all of those who consider bond issue
cost and again we’re gonna amortize them over the life the bonds the period that
the bonds are outstanding so again straight line
over the period the time that the bonds are outstanding that’s the way that we’re gonna amortize
those out that is called your bond issue cost so as we look at the calculation
again you’ll see it credit bonds payable for phase credit
accrued interest payable get a cash and then you get to pick
which were gonna amortized over the life of the bonds now at this point we have applied what
is your plug it the debit it’s a discount emits a
credit it’s a premium so discount or premium
that’s going to be the plug so one more time credit bonds payable
for face credit accrued interest which they don’t usually task get a cash David Beck different is the discount a
premium

11 thoughts on “Issuance of Bonds Journal Entry – Lesson 1

  1. 1) thank you for teaching this with such an unprecedented degree of enthusiasm
    2) I no longer feel silly about counting months on my fingers

  2. Going through my masters course, and bonds has been the most difficult subject yet. Thank you so much for your videos, not only helpful but entertaining.

  3. Oh man! I am in my first year accounting and this is some world class level of enthusiasm! that is all I am missing to get better at what I do. Thanks a lot.

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