[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:05.91,Default,,0000,0000,0000,,Professor Hawley: So, um, let's go ahead,\Nwe'll just work on this together.
Dialogue: 0,0:00:05.91,0:00:12.86,Default,,0000,0000,0000,,Um, it says, presented below are two\Nindependent situations.
Dialogue: 0,0:00:12.86,0:00:20.68,Default,,0000,0000,0000,,So, George Gershwin Company sold \N$2,000,000 of 10%, 10-year bonds at 104
Dialogue: 0,0:00:20.68,0:00:24.01,Default,,0000,0000,0000,,on January 1st of '25.
Dialogue: 0,0:00:24.01,0:00:27.51,Default,,0000,0000,0000,,The bonds were dated January 1st of '25.
Dialogue: 0,0:00:27.51,0:00:29.81,Default,,0000,0000,0000,,Okay, that was probably a repeat.
Dialogue: 0,0:00:29.81,0:00:34.04,Default,,0000,0000,0000,,And, pay interest on July 1st and \NJanuary 1st.
Dialogue: 0,0:00:34.04,0:00:39.57,Default,,0000,0000,0000,,If Gershwin uses the straight line method\Nto amortize bond premium or discount,
Dialogue: 0,0:00:39.57,0:00:44.94,Default,,0000,0000,0000,,determine the amount of interest expense\Nto be reported on July 1st '25 and
Dialogue: 0,0:00:44.94,0:00:49.14,Default,,0000,0000,0000,,December 31st of '25.
Dialogue: 0,0:00:49.14,0:00:53.79,Default,,0000,0000,0000,,Alright, well what I would like to do is\Nstart with the entry that would have been
Dialogue: 0,0:00:53.79,0:00:59.33,Default,,0000,0000,0000,,recorded when they issued the bond, \Njust so that we can kind of get that on
Dialogue: 0,0:00:59.33,0:01:01.42,Default,,0000,0000,0000,,paper so we can see it.
Dialogue: 0,0:01:01.42,0:01:04.78,Default,,0000,0000,0000,,So, we have-- the bonds were issued.
Dialogue: 0,0:01:04.78,0:01:09.02,Default,,0000,0000,0000,,This would be-- the $2 million would be\Nthe face value.
Dialogue: 0,0:01:09.02,0:01:13.38,Default,,0000,0000,0000,,And, 10% would be, what?
Dialogue: 0,0:01:13.38,0:01:16.30,Default,,0000,0000,0000,,The stated rate, okay.
Dialogue: 0,0:01:16.30,0:01:19.15,Default,,0000,0000,0000,,It's a 10-year bond.
Dialogue: 0,0:01:19.15,0:01:25.04,Default,,0000,0000,0000,,It was issued at 104, so that means that\Nit was issued at a premium.
Dialogue: 0,0:01:25.04,0:01:29.56,Default,,0000,0000,0000,,They're dated January 1st and they pay\Ninterest twice per year, so how many
Dialogue: 0,0:01:29.56,0:01:36.86,Default,,0000,0000,0000,,interest payment periods would \Nthere be in this bond?
Dialogue: 0,0:01:36.86,0:01:40.36,Default,,0000,0000,0000,,20, right, 'cause it's 10 years, they pay\Ninterest twice per year.
Dialogue: 0,0:01:40.36,0:01:45.16,Default,,0000,0000,0000,,So, because they are using the straight\Nline method, we would say there is
Dialogue: 0,0:01:45.16,0:01:55.09,Default,,0000,0000,0000,,20 interest payment periods.
Dialogue: 0,0:01:55.09,0:02:00.89,Default,,0000,0000,0000,,Okay, so on 1/1 when they issue the bonds,\Nhow much cash would they receive?
Dialogue: 0,0:02:00.89,0:02:08.05,Default,,0000,0000,0000,,Debit cash for the face value of \N$2 million times 1.04.
Dialogue: 0,0:02:08.05,0:02:16.43,Default,,0000,0000,0000,,And that would be a cash receipt\Nof $2,080,000.
Dialogue: 0,0:02:16.43,0:02:20.80,Default,,0000,0000,0000,,And then, how much did they need to pay\Nback at the end?
Dialogue: 0,0:02:20.80,0:02:32.74,Default,,0000,0000,0000,,They're going to credit bonds payable \Nfor always the face value, right?
Dialogue: 0,0:02:32.74,0:02:34.66,Default,,0000,0000,0000,,$2 million.
Dialogue: 0,0:02:34.66,0:02:39.84,Default,,0000,0000,0000,,Alright, and we clearly said this was\Nissued at a premium, so we know
Dialogue: 0,0:02:39.84,0:02:42.94,Default,,0000,0000,0000,,just by looking at this, to balance our\Nentry, we're going to have to credit
Dialogue: 0,0:02:42.94,0:02:53.17,Default,,0000,0000,0000,,$80,000 credit to premium on bonds--\NI'll just put BP-- bonds payable.
Dialogue: 0,0:02:53.17,0:02:59.65,Default,,0000,0000,0000,,So, if you get confused ever on what is \Nthe premium or is it a premium or a
Dialogue: 0,0:02:59.65,0:03:03.52,Default,,0000,0000,0000,,discount, look at your journal entry and\Nsee where it needs to go.
Dialogue: 0,0:03:03.52,0:03:05.52,Default,,0000,0000,0000,,It needs to be a credit or a debit.
Dialogue: 0,0:03:05.52,0:03:08.22,Default,,0000,0000,0000,,So, in this case, it needs to be a credit,\Nand we know that a premium on
Dialogue: 0,0:03:08.22,0:03:10.90,Default,,0000,0000,0000,,bonds payable has a normal credit balance.
Dialogue: 0,0:03:10.90,0:03:15.65,Default,,0000,0000,0000,,It's an adjunct account, meaning it comes\Nalongside the bond payable, it actually
Dialogue: 0,0:03:15.65,0:03:17.85,Default,,0000,0000,0000,,increases the bond payable.
Dialogue: 0,0:03:17.85,0:03:22.40,Default,,0000,0000,0000,,Where as, the discount on bonds payable\Nis a contra-account.
Dialogue: 0,0:03:22.40,0:03:25.73,Default,,0000,0000,0000,,It is the opposite, so it's a debit.
Dialogue: 0,0:03:25.73,0:03:30.76,Default,,0000,0000,0000,,Normal debit balance, and it's going to\Nsubtract, or it's going to reduce that bond payable.
Dialogue: 0,0:03:30.76,0:03:37.09,Default,,0000,0000,0000,,Okay, so, the premium is $80,000 and we\Ndetermined that we're going to divide that
Dialogue: 0,0:03:37.09,0:03:41.32,Default,,0000,0000,0000,,by 20, that's the number of interest \Npayment periods.
Dialogue: 0,0:03:41.32,0:03:51.69,Default,,0000,0000,0000,,And that would be $4,000 per \Ninterest payment period.
Dialogue: 0,0:03:51.69,0:03:56.96,Default,,0000,0000,0000,,Okay, so we're-- the question is asking\Nus to determine the interest expense
Dialogue: 0,0:03:56.96,0:04:00.13,Default,,0000,0000,0000,,to be reported on July 1 and\NDecember 31st.
Dialogue: 0,0:04:00.13,0:04:02.53,Default,,0000,0000,0000,,So, let's just do it in the form of a \Njournal entry.
Dialogue: 0,0:04:02.53,0:04:09.55,Default,,0000,0000,0000,,So on July 1 of '25, how much, um--\Nthe question is, in this case, if we're
Dialogue: 0,0:04:09.55,0:04:14.45,Default,,0000,0000,0000,,doing the straight line amortization,\Nwe know that we're going to debit
Dialogue: 0,0:04:14.45,0:04:20.83,Default,,0000,0000,0000,,interest expense, but with straight line\Namortization, the interest expense is
Dialogue: 0,0:04:20.83,0:04:23.49,Default,,0000,0000,0000,,the plug number, okay?
Dialogue: 0,0:04:23.49,0:04:29.34,Default,,0000,0000,0000,,We are going to credit cash because\Nwe're actually paying interest out,
Dialogue: 0,0:04:29.34,0:04:32.69,Default,,0000,0000,0000,,and at what rate are we paying \Ninterest out?
Dialogue: 0,0:04:32.69,0:04:36.11,Default,,0000,0000,0000,,So, 10% for 6 out of 12 months, right?
Dialogue: 0,0:04:36.11,0:04:38.74,Default,,0000,0000,0000,,So, it's at the stated rate.
Dialogue: 0,0:04:38.74,0:04:44.84,Default,,0000,0000,0000,,So we say, the face value of $2 million \Ntimes the stated rate of 10 % times
Dialogue: 0,0:04:44.84,0:04:49.40,Default,,0000,0000,0000,,the time, which is 6 out of 12 months.
Dialogue: 0,0:04:49.40,0:04:52.65,Default,,0000,0000,0000,,Which would be the same thing as\Nsaying 5%, right?
Dialogue: 0,0:04:52.65,0:05:02.65,Default,,0000,0000,0000,,Um, so the cash being paid out, if we do\Nthe math there, cash being paid out is $100,000.
Dialogue: 0,0:05:02.65,0:05:07.58,Default,,0000,0000,0000,,And, we need to amortize that discount--\Nsorry, excuse me, premium.
Dialogue: 0,0:05:07.58,0:05:11.46,Default,,0000,0000,0000,,And we determined that each interest\Nperiod we're going to amortize the
Dialogue: 0,0:05:11.46,0:05:13.50,Default,,0000,0000,0000,,premium by $4,000.
Dialogue: 0,0:05:13.50,0:05:17.91,Default,,0000,0000,0000,,Now, remember, the premium has a credit\Nbalance, so to amortize it, I need to
Dialogue: 0,0:05:17.91,0:05:19.35,Default,,0000,0000,0000,,debit it.
Dialogue: 0,0:05:19.35,0:05:27.51,Default,,0000,0000,0000,,So, I'm going to debit premium on\Nbonds payable $4,000.
Dialogue: 0,0:05:27.51,0:05:32.23,Default,,0000,0000,0000,,And then, the difference between what we \Npaid in cash and the premium that we
Dialogue: 0,0:05:32.23,0:05:35.32,Default,,0000,0000,0000,,amortized is going to be our\Ninterest expense.
Dialogue: 0,0:05:35.32,0:05:37.82,Default,,0000,0000,0000,,So, $96,000.
Dialogue: 0,0:05:37.82,0:05:44.91,Default,,0000,0000,0000,,So, you can also think of it as when you \Nissue bonds at a discount, the interest
Dialogue: 0,0:05:44.91,0:05:50.67,Default,,0000,0000,0000,,expense-- sorry, premium-- the interest\Nexpense per period is reduced.
Dialogue: 0,0:05:50.67,0:05:55.24,Default,,0000,0000,0000,,Why? Because you received more\Ncash up front, so the amount that you're--
Dialogue: 0,0:05:55.24,0:06:00.53,Default,,0000,0000,0000,,you're paying interest on a smaller face\Nvalue, but you received more cash.
Dialogue: 0,0:06:00.53,0:06:04.19,Default,,0000,0000,0000,,So, it's effectively reducing your \Ninterest rate because you received
Dialogue: 0,0:06:04.19,0:06:06.56,Default,,0000,0000,0000,,more cash up front.
Dialogue: 0,0:06:06.56,0:06:11.41,Default,,0000,0000,0000,,And then on 12/31, the entry \Nwould be similar.
Dialogue: 0,0:06:11.41,0:06:16.10,Default,,0000,0000,0000,,We're going to debit interest expense.
Dialogue: 0,0:06:16.10,0:06:21.24,Default,,0000,0000,0000,,We're going to debit premium on \Nbonds payable.
Dialogue: 0,0:06:21.24,0:06:25.27,Default,,0000,0000,0000,,And that's going to be at that same \Nstraight line rate, so that's $4,000.
Dialogue: 0,0:06:25.27,0:06:29.75,Default,,0000,0000,0000,,And then, we're going to credit-- and\Nthis one is payable on January 1st.
Dialogue: 0,0:06:29.75,0:06:42.82,Default,,0000,0000,0000,,So, we're going to credit interest payable\N$100,000.
Dialogue: 0,0:06:42.82,0:06:48.30,Default,,0000,0000,0000,,And again, the interest expense\Nis going to remain the same at $96,000.
Dialogue: 0,0:06:48.30,0:06:51.53,Default,,0000,0000,0000,,Alright, let's do part B then.
Dialogue: 0,0:06:51.53,0:06:59.33,Default,,0000,0000,0000,,Um, Ron Kenoly Inc. issued $600,000\N9%, 10-year bonds on June 30th of '25
Dialogue: 0,0:06:59.33,0:07:02.91,Default,,0000,0000,0000,,for $562,500.
Dialogue: 0,0:07:02.91,0:07:07.62,Default,,0000,0000,0000,,This price provides a yield of 10%.
Dialogue: 0,0:07:07.62,0:07:10.24,Default,,0000,0000,0000,,Okay, so we have 2 different interest rates.
Dialogue: 0,0:07:10.24,0:07:12.01,Default,,0000,0000,0000,,9% is, what?
Dialogue: 0,0:07:12.01,0:07:17.19,Default,,0000,0000,0000,,9% is the stated rate,\Nand 10% is the market rate,
Dialogue: 0,0:07:17.19,0:07:19.06,Default,,0000,0000,0000,,or the effective rate.
Dialogue: 0,0:07:19.06,0:07:25.59,Default,,0000,0000,0000,,Interest is payable semiannually\Non December 31st and June 30th.
Dialogue: 0,0:07:25.59,0:07:30.07,Default,,0000,0000,0000,,If Kenoly uses the effective interest \Nmethod, determine the amount of
Dialogue: 0,0:07:30.07,0:07:36.78,Default,,0000,0000,0000,,interest expense to record if financial\Nstatements are issued on October 31st of '25.
Dialogue: 0,0:07:36.78,0:07:40.65,Default,,0000,0000,0000,,So, this one's a little more-- it's got a\Nlittle more different things going on here.
Dialogue: 0,0:07:40.65,0:07:45.73,Default,,0000,0000,0000,,So, not only are we using the effective \Nmethod, but we are also only calculating
Dialogue: 0,0:07:45.73,0:07:49.41,Default,,0000,0000,0000,,interest expense through October 31st.
Dialogue: 0,0:07:49.41,0:07:55.48,Default,,0000,0000,0000,,Okay, so first, again, let's go ahead and\Nrecord the issuance of the bonds.
Dialogue: 0,0:07:55.48,0:08:03.59,Default,,0000,0000,0000,,They issued the bonds on 6/30,\Nand they're going to debit cash.
Dialogue: 0,0:08:03.59,0:08:11.26,Default,,0000,0000,0000,,They said they received-- they told us\Nhow much they received-- $562,500.
Dialogue: 0,0:08:11.26,0:08:16.76,Default,,0000,0000,0000,,And, we're going to record a credit to\Nbonds payable always for the face value,
Dialogue: 0,0:08:16.76,0:08:19.09,Default,,0000,0000,0000,,which is $600,000.
Dialogue: 0,0:08:19.09,0:08:25.21,Default,,0000,0000,0000,,Which means they recorded those bonds\Nat a discount.
Dialogue: 0,0:08:25.21,0:08:34.89,Default,,0000,0000,0000,,And so, we're going to debit discount on\Nbonds payable for $37,500.
Dialogue: 0,0:08:34.89,0:08:37.20,Default,,0000,0000,0000,,That's going to balance our entry, right?
Dialogue: 0,0:08:37.20,0:08:43.98,Default,,0000,0000,0000,,Alright, now, assuming that we are going\Nto issue financial statements on September 31st,
Dialogue: 0,0:08:43.98,0:08:46.07,Default,,0000,0000,0000,,what do we need to do?
Dialogue: 0,0:08:46.07,0:08:49.13,Default,,0000,0000,0000,,We need to make sure that those financial\Nstatements are up to date with regard to
Dialogue: 0,0:08:49.13,0:08:53.98,Default,,0000,0000,0000,,interest expense and interest payable.
Dialogue: 0,0:08:53.98,0:08:56.68,Default,,0000,0000,0000,,How much do we owe at that time?
Dialogue: 0,0:08:56.68,0:09:07.84,Default,,0000,0000,0000,,So, on 10/31/25, we're going to debit \Ninterest expense.
Dialogue: 0,0:09:07.84,0:09:12.03,Default,,0000,0000,0000,,And, how much interest expense\Nwould there have been?
Dialogue: 0,0:09:12.03,0:09:16.28,Default,,0000,0000,0000,,How do we calculate using the effective\Nmethod--the effective interest method?
Dialogue: 0,0:09:16.28,0:09:20.36,Default,,0000,0000,0000,,Well, if we look-- if we net together the \Ndiscount and the bonds payable,
Dialogue: 0,0:09:20.36,0:09:30.21,Default,,0000,0000,0000,,we'll see that the carrying value of the\Nloan is $562,500 as of 6/30.
Dialogue: 0,0:09:30.21,0:09:35.94,Default,,0000,0000,0000,,So, when we say that's our debt\Noutstanding from 6/30 to 12-- excuse me,
Dialogue: 0,0:09:35.94,0:09:38.49,Default,,0000,0000,0000,,to October 31st.
Dialogue: 0,0:09:38.49,0:09:43.30,Default,,0000,0000,0000,,So, all of July, August, September, \NOctober, so 4 months, um, interest
Dialogue: 0,0:09:43.30,0:09:45.35,Default,,0000,0000,0000,,has been accruing.
Dialogue: 0,0:09:45.35,0:09:48.94,Default,,0000,0000,0000,,So if we take this to calculate our \Ninterest expense using the effective rate,
Dialogue: 0,0:09:48.94,0:09:53.52,Default,,0000,0000,0000,,we're going to say times the effective\Nrate of 10%, or the yield rate.
Dialogue: 0,0:09:53.52,0:09:59.63,Default,,0000,0000,0000,,But then also, times 4 out of 12 because \Nit's only 4 months that has passed by.
Dialogue: 0,0:09:59.63,0:10:08.85,Default,,0000,0000,0000,,So, we're going to debit interest expense\Nby $562,500 times 10% times 4/12.
Dialogue: 0,0:10:08.85,0:10:15.44,Default,,0000,0000,0000,,That would be $18,750, okay.
Dialogue: 0,0:10:15.44,0:10:23.31,Default,,0000,0000,0000,,And then, we're going to credit interest\Npayable, and this is going to represent, what?
Dialogue: 0,0:10:23.31,0:10:27.48,Default,,0000,0000,0000,,How much cash we have due at this moment.
Dialogue: 0,0:10:27.48,0:10:30.23,Default,,0000,0000,0000,,And so, how do you think we would\Ncalculate the interest payable?
Dialogue: 0,0:10:36.61,0:10:40.87,Default,,0000,0000,0000,,So for interest payable, it's just the\Ncash that we would pay if we had to pay
Dialogue: 0,0:10:40.87,0:10:49.14,Default,,0000,0000,0000,,right now would be the face value times \Nthe stated rate times time.
Dialogue: 0,0:10:49.14,0:10:54.97,Default,,0000,0000,0000,,So in this case, the face value is\N$600,000 times the stated rate, which
Dialogue: 0,0:10:54.97,0:10:59.77,Default,,0000,0000,0000,,is 9%, times 4 out of 12.
Dialogue: 0,0:10:59.77,0:11:07.90,Default,,0000,0000,0000,,And so, if we do the math there, that's\N$18,000.
Dialogue: 0,0:11:07.90,0:11:13.98,Default,,0000,0000,0000,,Now remember, when we use the effective\Ninterest method, what is the plug?
Dialogue: 0,0:11:13.98,0:11:17.81,Default,,0000,0000,0000,,The plug number is the discount or \Npremium amortization.
Dialogue: 0,0:11:17.81,0:11:21.96,Default,,0000,0000,0000,,So, here we have a discount, we're \Namortizing it, so we're going to credit it
Dialogue: 0,0:11:21.96,0:11:28.16,Default,,0000,0000,0000,,to make it smaller-- discount on bonds\Npayable, the difference is going to be
Dialogue: 0,0:11:28.16,0:11:35.40,Default,,0000,0000,0000,,$750, so that's going to be\Nour amortization, okay.