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Professor Hawley: So, um, let's go ahead,
we'll just work on this together.

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Um, it says, presented below are two
independent situations.

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So, George Gershwin Company sold 
$2,000,000 of 10%, 10-year bonds at 104

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on January 1st of '25.

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The bonds were dated January 1st of '25.

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Okay, that was probably a repeat.

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And, pay interest on July 1st and 
January 1st.

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If Gershwin uses the straight line method
to amortize bond premium or discount,

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determine the amount of interest expense
to be reported on July 1st '25 and

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December 31st of '25.

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Alright, well what I would like to do is
start with the entry that would have been

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recorded when they issued the bond, 
just so that we can kind of get that on

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paper so we can see it.

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So, we have-- the bonds were issued.

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This would be-- the $2 million would be
the face value.

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And, 10% would be, what?

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The stated rate, okay.

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It's a 10-year bond.

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It was issued at 104, so that means that
it was issued at a premium.

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They're dated January 1st and they pay
interest twice per year, so how many

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interest payment periods would 
there be in this bond?

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20, right, 'cause it's 10 years, they pay
interest twice per year.

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So, because they are using the straight
line method, we would say there is

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20 interest payment periods.

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Okay, so on 1/1 when they issue the bonds,
how much cash would they receive?

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Debit cash for the face value of 
$2 million times 1.04.

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And that would be a cash receipt
of $2,080,000.

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And then, how much did they need to pay
back at the end?

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They're going to credit bonds payable 
for always the face value, right?

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$2 million.

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Alright, and we clearly said this was
issued at a premium, so we know

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just by looking at this, to balance our
entry, we're going to have to credit

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$80,000 credit to premium on bonds--
I'll just put BP-- bonds payable.

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So, if you get confused ever on what is 
the premium or is it a premium or a

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discount, look at your journal entry and
see where it needs to go.

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It needs to be a credit or a debit.

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So, in this case, it needs to be a credit,
and we know that a premium on

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bonds payable has a normal credit balance.

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It's an adjunct account, meaning it comes
alongside the bond payable, it actually

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increases the bond payable.

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Where as, the discount on bonds payable
is a contra-account.

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It is the opposite, so it's a debit.

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Normal debit balance, and it's going to
subtract, or it's going to reduce that bond payable.

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Okay, so, the premium is $80,000 and we
determined that we're going to divide that

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by 20, that's the number of interest 
payment periods.

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And that would be $4,000 per 
interest payment period.

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Okay, so we're-- the question is asking
us to determine the interest expense

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to reported on July 1 and December 31st.

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So, let's just do it in the form of a 
journal entry.

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So on July 1 of '25, how much, um--
the question is, in this case, if we're

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doing the straight line amortization,
we know that we're going to debit

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interest expense, but with straight line
amortization, the interest expense is

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the plug number, okay?

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We are going to credit cash because
we're actually paying interest out,

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and at what rate are we paying 
interest out?

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So, 10% for 6 out of 12 months, right?

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So, it's at the stated rate.

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So we say, the face value of $2 million 
times the stated rate of 10 % times

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the time, which is 6 out of 12 months.

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Which would be the same thing as
saying 5%, right?

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Um, so the cash being paid out, if we do
the math there, cash being paid out is $100,000.

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And, we need to amortize that discount--
sorry, excuse me, premium.

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And we determined that each interest
period we're going to amortize the

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premium by $4,000.

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Now, remember, the premium has a credit
balance, so to amortize it, I need to

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debit it.

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So, I'm going to debit premium on
bonds payable $4,000.

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And then, the difference between what we 
paid in cash and the premium that we

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amortized is going to be our
interest expense.

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So, $96,000.

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So, you can also think of it as when you 
issue bonds at a discount, the interest

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expense-- sorry, premium-- the interest
expense per period is reduced.

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Why? Because you received more
cash up front, so the amount that you're--

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you're paying interest on a smaller face
value, but you received more cash,.

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So, it's effectively reducing your 
interest rate because you received

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more cash up front.

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And then on 12/31, the entry 
would be similar.

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We're going to debit interest expense.

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We're going to debit premium on 
bonds payable.

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And that's going to be at that same 
straight line rate, so that's $4,000.

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And then, we're going to credit-- and
this one is payable on January 1st.

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So, we're going to credit interest payable
$100,000.

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And again, the interest expense
i going to remain the same at $96,000.

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Alright, let's do part B then.

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Um, Ron Kenoly Inc. issued $600,000
9%, 10-year bonds on June 30th of '25

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for $562,500.

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This price provides a yield of 10%.

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Okay, so we have 2 different interest rates.

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9% is, what?

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9% is the stated rate,
and 10% is the market rate,

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or the effective rate.

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Interest is payable semiannually
on December 31st and June 30th.

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If Kenoly uses the effective interest 
method, determine the amount of

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interest expense to record if financial
statements are issued on October 31st of '25.

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So, this one's a little more-- it's got a
little more different things going on here.

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So, not only are we using the effective 
method, but we are also only calculating

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interest expense through October 31st.

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Okay, so first, again, let's go ahead and
record the issuance of the bonds.

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They issued the bonds on 6/30,
and they're going to debit cash.

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They said they received-- they told us
how much they received-- $562,500.

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And, we're going to record a credit to
bonds payable always for the face value,

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which is $600,000.

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Which means they recorded those bonds
at a discount.

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And so, we're going to debit discount on
bonds payable for $37,500.

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That's going to balance our entry, right?

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Alright, now, assuming that we are going
to issue financial statements on September 31st,

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what do we need to do?

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We need to make sure that those financial
statements are up to date with regard to

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interest expense and interest payable.

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How much do we owe at that time?

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So, on 10/31/25, we're going to debit 
interest expense.

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And, how much interest expense
would there have been?

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How do we calculate using the effective
method--the effective interest method?

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Well, if we look-- if we net together the 
discount and the bonds payable,

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we'll see that the carrying value of the
loan is $562,500 as of 6/30.

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So, when we say that's our debt
outstanding from 6/30 to 12-- excuse me,

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to October 31st.

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So, all of July, August, September, 
October, so 4 months, um, interest

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has been accruing.

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So if we take this to calculate our 
interest expense using the effective rate,

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we're going to say times the effective
rate of 10%, or the yield rate.

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But then also, times 4 out of 12 because 
it's only 4 months that has passed by.

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So, we're going to debit interest expense
by $562,500 times 10% times 4/12.

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That would be $18,750, okay.

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And then, we're going to credit interest
payable, and this is going to represent, what?

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How much cash we have due at this moment.

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And so, how do you think we would
calculate the interest payable?

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So for interest payable, it's just the
cash that we would pay if we had to pay

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right now would be the face value times 
the stated rate times time.

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So in this case, the face value is
$600,000 times the stated rate, which

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is 9%, times 4 out of 12.

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And so, if we do the math there, that's
$18,000.

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Now remember, when we use the effective
interest method, what is the plug?

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The plug number is the discount or 
premium amortization.

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So, here we have a discount, we're 
amortizing it, so we're going to credit it

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to make it smaller-- discount on bonds
payable, the difference is going to be

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$750, so that's going to be
our amortization, okay.