[smalltimeauditor]

Seems like I’ve been stuck on this section for 3 days now and it still doesn’t resonate. It all makes sense when I read the notes/listen to the audio, but when I start seeing %’s,the journal entries, etc, my mind just turns to mush.

Should I just skip it and move on? There’s so much material on this exam…

B - Passed
A - Passed
R - Passed
F - Passed

[Anonymous]

Bonds would not be one of the section's that you would want to skip, haha. Can you be more specific in regards to the issue you are having?

[Anonymous]

Bonds would not be one of the section's that you would want to skip, haha. Can you be more specific in regards to the issue you are having?

[acamp]

I started to want to explain the fundamentals of bonds to better explain the journal entries, but only had enough energy to write this sentence 🙁

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[acamp]

Well, its morning and its still unanswered,

Premium: Market Rates < Coupon(bond interest rate) = Hey I'll pay more than face for that!

Discount: Market Rates > Coupon (bond interest rate) = Hey I'm only gonna pay less than face for that!

So, if you get more money than the face value of the bond, it is carried at a higher amount, so a premium is booked and it must be a credit and the bond itself is a liability and you cant increase a liability with a debit! Just the same, a discounted bond is carried below is face, so there must be a discount debit to reduce the carrying value.

Now what to do on a month to month basis. I think one of the best ways to think about a bond is the fact that they are all heading towards par–that is over time, even the most premium bond (stated rate wildly exceeded market) is going to be near face value the day before its due.

So if you have a discount bond, some entry is needed to get rid of the discount, since we know the discount must be a debit (to reduce the carrying value of the bond) the discount amortization must be a credit. Just the same, a premium bond needs to be reduced each period and since the premium is a credit the premium amortization is a debit.

Now, how the hell do these actually line up?! A journal entry has to balance right? With a discount bond you are taking less money for the instrument, therefore the effective interest rate is higher, so more interest is recognized each period than what is actually paid. Interest Expense > Interest Payment

Conversely with a premium bond, the effective interest is LESS than the coupon. So Interest Expense < Interest Payment.

So we end up with something like this (and I don't have my financial calc out, so I'll makeup some numbers)

Sell Premium Bond: Face $1000 Term 5 years, Annual Coupon Payment at 10%, Market Rate 8%.

Lets say it sells for $1100

Initial Entry

Dr.. Cash $1100

Cr. Bond Payable $1000

Cr. Bond Premium $100

Monthly

Dr. Interest Expense $90

Dr. Bond Premium $10

Cr. Cash $100

Again, numbers are made up, but it paints the picture. A premium bond will have an interest expense less than the cash payment.

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[smalltimeauditor]

Sorry, I forgot I started this thread!

@acamp – wow, i think jeff, roger, and tim/peter should watch their backs. you should be writing your own review course, well done and very easy to understand. it's funny – when i do a question, i usually wonder aloud “How the hell…” Nice touch.

I definitely have a better understand now. Sometime you just need to hear it from another person.

B - Passed
A - Passed
R - Passed
F - Passed

[acamp]

Thanks, glad I could help 🙂

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[Jason2345]

It will be hard to pass if you don't know bonds.

[Author]

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