Accounting for Bonds Payable _ Principles of Accounting.txt...

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Unformatted text preview: Accounting for Bonds Payable | Principles of Accounting 00:00:00 [MUSIC]. 00:00:07 Suppose that the town of Blue sold series a bonds with the face amount of 50 million dollars and a stated rate of interest that 10% and 97. 00:00:16 The bonds will mature in 30 years and pay the stated rate of interest twice a year. 00:00:23 These bonds sold at 97% of face value, or $48,500,000. 00:00:29 The difference of $1,500,000 is the discount of bonds payable. 00:00:34 The reason the bonds sold at a discount is because the market rate of interest is greater than the stated rate of 10%. 00:00:42 And therefore investors are only willing to buy the bond at less than full price. 00:00:46 [MUSIC] 00:00:47 Suppose the bonds were issued on January 1st. 00:00:50 On January 1st, Blue would recognize receipts of $48,500,000 in cash, but he would also recognize a bond payable liability of $50,000,000. 00:00:59 The debit shortage of 1,500,000 is the discount on bonds payable. 00:01:07 Think of discount on bonds payable as prepaid interest. 00:01:10 This is the interest the issuer of the bond prepaid to bond holders by way of discounting the bond price upfront. 00:01:18 As part of the recognition of the bond discount over time, the amortization process begins by dividing the total discount by the life of the bond. 00:01:27 Therefore, the $1,500,000 will be amortized equally 30 years and twice a year, for a total of 60 periods. 00:01:35 There are a few ways to amortize discounts. 00:01:38 Assume that the town of Blue uses the straight-line method of amortization because it's the simplest. 00:01:44 Blue would make an entry on June 30th to recognize the bond discount amortization and the semi annual interest payments. 00:01:52 Note that the bond holders will only receive $2,500,000 in cash. 00:01:57 Which is the stated rate of the bond 10% times the face value of the bond $15 million divided by 2, since interest is paid semi annually. 00:02:06 However, the interest expense is $25,000 higher because it includes the amortization of bond discount, which is more or less like prepaid interest. 00:02:15 [MUSIC] 00:02:18 Bonds can also be sold at a premium. 00:02:21 Suppose that the town of Blue sold serious a bonds with the face amount of $50 million and a stated rate of interest that 10% at 103. 00:02:30 The bonds will mature in 30 years and pay the state of rate of interest twice a year. 00:02:36 These bonds sold at 103% of face value or $51,500,000. 00:02:42 The difference of $1,500,000 is the premium on bonds payable. 00:02:48 The reason the bonds sold at a premium is because the market rate of interest is lower than the stated rate of 10%. 00:02:54 And therefore, investors are willing to buy the bond at a price above the face value. 00:03:00 Suppose the bonds were issued on January 1st. 00:03:03 On January 1st, Blue would recognize receipt of $51,500,000 in cash, along with a bond payable liability of $50 million. 00:03:12 The credit shortage of $1,500,000 is the premium on bonds payable. 00:03:19 As part of the recognition of the bond premium over time, the amortization process begins by dividing the total premium by the life of the bonds. 00:03:27 Therefore, the $1,500,000 would be amortized equally 30 years and twice a year, a total of 60 periods. 00:03:35 [MUSIC] 00:03:36 Assume that the town of Blue uses the straight-line method to amortize the premium. 00:03:41 Blue would make an entry June 30th to recognize the bond premium amortization and the semi-annual interest payment. 00:03:49 Note, that the bond holders will receive $2,500,000 in cash. 00:03:54 Which is the stated rate of the bond, 10%, times the face value of the bond, $50 million, divided by two since interest is based semi-annually. 00:04:03 However, the interest expense is $25,000 lower because of the effect of the premium amortization. 00:04:11 Bonds are not always sold at a premium or discount. 00:04:15 If the stated rate of interest is the same as the going market rate, then they will simply sell at face value and there will be nothing to amortize. 00:04:23 Assume that the stated rate of interest on Blue's bonds is 10% and the market rate is also 10%. 00:04:29 The bonds would sell at face value, or $50 million in this example. 00:04:34 The entry would simply recognize the receipt of cash and the corresponding liability. 00:04:39 On June 30th, Blue would then recognize the 10% semi annual interest expense and cash payment, which will be identical, since it is not amortizing any premium or discount. 00:04:50 [MUSIC] cielo24 | what’s in your video? | cielo24.com...
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