@Moni The bond is only worth 285,000 at year end. Bond discounts are essentially extra interest expense that will be amortized to earnings either using the effective interest rate method, or straight line method over the life of the bond. Remember, we only book interest expense when incurred, and in this case the interest expense has not been incurred yet because it's unamortized. Say we sold bonds at a discount of 285,000 and the maturity value was 300,000. The client only paid 285,000 for a 300,000 bond, and the 15k difference represents extra interest expense, which we will book over the course of the bonds life, and then eventually pay to the client at the very end. Every time we amortize a piece of the discount, the balance we owe to the client grows, so long story short, we only technically owe the client 285,000 at year end lol.
To follow up, the initial principle is 300,000, but we took away a portion of that and will instead count it as extra interest expense over the bonds life. The client will get the 300,000 at the maturity date, but technically because we discounted it, 285,000 of the 300,000 would be principle, and 15,000 would be interest.
And remember interest expense is only recognized on the balance sheet when incurred, so we only owe the discounted (285,000) principle at this point.
FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.
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