9:59:59.000,9:59:59.000 Professor Hawley: So, um, let's go ahead,[br]we'll just work on this together. 9:59:59.000,9:59:59.000 Um, it says, presented below are two[br]independent situations. 9:59:59.000,9:59:59.000 So, George Gershwin Company sold [br]$2,000,000 of 10%, 10-year bonds at 104 9:59:59.000,9:59:59.000 on January 1st of '25. 9:59:59.000,9:59:59.000 The bonds were dated January 1st of '25. 9:59:59.000,9:59:59.000 Okay, that was probably a repeat. 9:59:59.000,9:59:59.000 And, pay interest on July 1st and [br]January 1st. 9:59:59.000,9:59:59.000 If Gershwin uses the straight line method[br]to amortize bond premium or discount, 9:59:59.000,9:59:59.000 determine the amount of interest expense[br]to be reported on July 1st '25 and 9:59:59.000,9:59:59.000 December 31st of '25. 9:59:59.000,9:59:59.000 Alright, well what I would like to do is[br]start with the entry that would have been 9:59:59.000,9:59:59.000 recorded when they issued the bond, [br]just so that we can kind of get that on 9:59:59.000,9:59:59.000 paper so we can see it. 9:59:59.000,9:59:59.000 So, we have-- the bonds were issued. 9:59:59.000,9:59:59.000 This would be-- the $2 million would be[br]the face value. 9:59:59.000,9:59:59.000 And, 10% would be, what? 9:59:59.000,9:59:59.000 The stated rate, okay. 9:59:59.000,9:59:59.000 It's a 10-year bond. 9:59:59.000,9:59:59.000 It was issued at 104, so that means that[br]it was issued at a premium. 9:59:59.000,9:59:59.000 They're dated January 1st and they pay[br]interest twice per year, so how many 9:59:59.000,9:59:59.000 interest payment periods would [br]there be in this bond? 9:59:59.000,9:59:59.000 20, right, 'cause it's 10 years, they pay[br]interest twice per year. 9:59:59.000,9:59:59.000 So, because they are using the straight[br]line method, we would say there is 9:59:59.000,9:59:59.000 20 interest payment periods. 9:59:59.000,9:59:59.000 Okay, so on 1/1 when they issue the bonds,[br]how much cash would they receive? 9:59:59.000,9:59:59.000 Debit cash for the face value of [br]$2 million times 1.04. 9:59:59.000,9:59:59.000 And that would be a cash receipt[br]of $2,080,000. 9:59:59.000,9:59:59.000 And then, how much did they need to pay[br]back at the end? 9:59:59.000,9:59:59.000 They're going to credit bonds payable [br]for always the face value, right? 9:59:59.000,9:59:59.000 $2 million. 9:59:59.000,9:59:59.000 Alright, and we clearly said this was[br]issued at a premium, so we know 9:59:59.000,9:59:59.000 just by looking at this, to balance our[br]entry, we're going to have to credit 9:59:59.000,9:59:59.000 $80,000 credit to premium on bonds--[br]I'll just put BP-- bonds payable. 9:59:59.000,9:59:59.000 So, if you get confused ever on what is [br]the premium or is it a premium or a 9:59:59.000,9:59:59.000 discount, look at your journal entry and[br]see where it needs to go. 9:59:59.000,9:59:59.000 It needs to be a credit or a debit. 9:59:59.000,9:59:59.000 So, in this case, it needs to be a credit,[br]and we know that a premium on 9:59:59.000,9:59:59.000 bonds payable has a normal credit balance. 9:59:59.000,9:59:59.000 It's an adjunct account, meaning it comes[br]alongside the bond payable, it actually 9:59:59.000,9:59:59.000 increases the bond payable. 9:59:59.000,9:59:59.000 Where as, the discount on bonds payable[br]is a contra-account. 9:59:59.000,9:59:59.000 It is the opposite, so it's a debit. 9:59:59.000,9:59:59.000 Normal debit balance, and it's going to[br]subtract, or it's going to reduce that bond payable. 9:59:59.000,9:59:59.000 Okay, so, the premium is $80,000 and we[br]determined that we're going to divide that 9:59:59.000,9:59:59.000 by 20, that's the number of interest [br]payment periods. 9:59:59.000,9:59:59.000 And that would be $4,000 per [br]interest payment period. 9:59:59.000,9:59:59.000 Okay, so we're-- the question is asking[br]us to determine the interest expense 9:59:59.000,9:59:59.000 to reported on July 1 and December 31st. 9:59:59.000,9:59:59.000 So, let's just do it in the form of a [br]journal entry. 9:59:59.000,9:59:59.000 So on July 1 of '25, how much, um--[br]the question is, in this case, if we're 9:59:59.000,9:59:59.000 doing the straight line amortization,[br]we know that we're going to debit 9:59:59.000,9:59:59.000 interest expense, but with straight line[br]amortization, the interest expense is 9:59:59.000,9:59:59.000 the plug number, okay? 9:59:59.000,9:59:59.000 We are going to credit cash because[br]we're actually paying interest out, 9:59:59.000,9:59:59.000 and at what rate are we paying [br]interest out? 9:59:59.000,9:59:59.000 So, 10% for 6 out of 12 months, right? 9:59:59.000,9:59:59.000 So, it's at the stated rate. 9:59:59.000,9:59:59.000 So we say, the face value of $2 million [br]times the stated rate of 10 % times 9:59:59.000,9:59:59.000 the time, which is 6 out of 12 months. 9:59:59.000,9:59:59.000 Which would be the same thing as[br]saying 5%, right? 9:59:59.000,9:59:59.000 Um, so the cash being paid out, if we do[br]the math there, cash being paid out is $100,000. 9:59:59.000,9:59:59.000 And, we need to amortize that discount--[br]sorry, excuse me, premium. 9:59:59.000,9:59:59.000 And we determined that each interest[br]period we're going to amortize the 9:59:59.000,9:59:59.000 premium by $4,000. 9:59:59.000,9:59:59.000 Now, remember, the premium has a credit[br]balance, so to amortize it, I need to 9:59:59.000,9:59:59.000 debit it. 9:59:59.000,9:59:59.000 So, I'm going to debit premium on[br]bonds payable $4,000. 9:59:59.000,9:59:59.000 And then, the difference between what we [br]paid in cash and the premium that we 9:59:59.000,9:59:59.000 amortized is going to be our[br]interest expense. 9:59:59.000,9:59:59.000 So, $96,000. 9:59:59.000,9:59:59.000 So, you can also think of it as when you [br]issue bonds at a discount, the interest 9:59:59.000,9:59:59.000 expense-- sorry, premium-- the interest[br]expense per period is reduced. 9:59:59.000,9:59:59.000 Why? Because you received more[br]cash up front, so the amount that you're-- 9:59:59.000,9:59:59.000 you're paying interest on a smaller face[br]value, but you received more cash,. 9:59:59.000,9:59:59.000 So, it's effectively reducing your [br]interest rate because you received 9:59:59.000,9:59:59.000 more cash up front. 9:59:59.000,9:59:59.000 And then on 12/31, the entry [br]would be similar. 9:59:59.000,9:59:59.000 We're going to debit interest expense. 9:59:59.000,9:59:59.000 We're going to debit premium on [br]bonds payable. 9:59:59.000,9:59:59.000 And that's going to be at that same [br]straight line rate, so that's $4,000. 9:59:59.000,9:59:59.000 And then, we're going to credit-- and[br]this one is payable on January 1st. 9:59:59.000,9:59:59.000 So, we're going to credit interest payable[br]$100,000. 9:59:59.000,9:59:59.000 And again, the interest expense[br]i going to remain the same at $96,000. 9:59:59.000,9:59:59.000 Alright, let's do part B then. 9:59:59.000,9:59:59.000 Um, Ron Kenoly Inc. issued $600,000[br]9%, 10-year bonds on June 30th of '25 9:59:59.000,9:59:59.000 for $562,500. 9:59:59.000,9:59:59.000 This price provides a yield of 10%. 9:59:59.000,9:59:59.000 Okay, so we have 2 different interest rates. 9:59:59.000,9:59:59.000 9% is, what? 9:59:59.000,9:59:59.000 9% is the stated rate,[br]and 10% is the market rate, 9:59:59.000,9:59:59.000 or the effective rate. 9:59:59.000,9:59:59.000 Interest is payable semiannually[br]on December 31st and June 30th. 9:59:59.000,9:59:59.000 If Kenoly uses the effective interest [br]method, determine the amount of 9:59:59.000,9:59:59.000 interest expense to record if financial[br]statements are issued on October 31st of '25. 9:59:59.000,9:59:59.000 So, this one's a little more-- it's got a[br]little more different things going on here. 9:59:59.000,9:59:59.000 So, not only are we using the effective [br]method, but we are also only calculating 9:59:59.000,9:59:59.000 interest expense through October 31st. 9:59:59.000,9:59:59.000 Okay, so first, again, let's go ahead and[br]record the issuance of the bonds. 9:59:59.000,9:59:59.000 They issued the bonds on 6/30,[br]and they're going to debit cash. 9:59:59.000,9:59:59.000 They said they received-- they told us[br]how much they received-- $562,500. 9:59:59.000,9:59:59.000 And, we're going to record a credit to[br]bonds payable always for the face value, 9:59:59.000,9:59:59.000 which is $600,000. 9:59:59.000,9:59:59.000 Which means they recorded those bonds[br]at a discount. 9:59:59.000,9:59:59.000 And so, we're going to debit discount on[br]bonds payable for $37,500. 9:59:59.000,9:59:59.000 That's going to balance our entry, right? 9:59:59.000,9:59:59.000 Alright, now, assuming that we are going[br]to issue financial statements on September 31st, 9:59:59.000,9:59:59.000 what do we need to do? 9:59:59.000,9:59:59.000 We need to make sure that those financial[br]statements are up to date with regard to 9:59:59.000,9:59:59.000 interest expense and interest payable. 9:59:59.000,9:59:59.000 How much do we owe at that time? 9:59:59.000,9:59:59.000 So, on 10/31/25, we're going to