Accounting-Bonds Payable, Notes Payable, Liabilities | Robert Steele | Skillshare

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Accounting-Bonds Payable, Notes Payable, Liabilities

teacher avatar Robert Steele

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Taught by industry leaders & working professionals
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Watch this class and thousands more

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

19 Lessons (3h 27m)
    • 1. 10 Bonds & Notes Payable Introduction

      9:34
    • 2. 20 Bond Issued at Par

      5:36
    • 3. 25 Bonds Market Rate vs Contract Rate

      7:32
    • 4. 40 Issue bond at a discount%2C calculate%2C and record interest payment

      26:14
    • 5. 50 Bond Issued at Premium

      7:19
    • 6. 60 Premium Amortization & Interest

      12:30
    • 7. 70 Bond Price Present Value Tables

      9:22
    • 8. 75 Bonds Present Value Formulas

      13:32
    • 9. 90 Bond Price Excel Formula

      12:32
    • 10. 100 Bond Retirement

      8:42
    • 11. 110 Notes Payable Introduction

      5:18
    • 12. 120 Note Payable Journal Entry

      3:46
    • 13. 130 Amortization Schedule

      11:51
    • 14. 140 Notes Payable Payments Journal Entry

      7:11
    • 15. 150 Notes Payable Adjusting Entry

      9:49
    • 16. 170 Notes Payable Current vs

      18:10
    • 17. 235 Discount Amortization Effective Method

      13:18
    • 18. 240 Premium Amortization Effective Method

      13:17
    • 19. 250 Leases Capital vs

      11:53
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About This Class

Bonds payable, notes payable, and liabilities will introduce the concept of bonds from a corporate perspective and explain how to record the issuance of bonds and notes payable.

We will discuss the journal entry for issuing bonds at par value, at a discount, and at a premium.

The course will cover present value calculations in multiple formats. Present value calculations are often confusing to learners partially because the topic can be introduced in many ways. We will look at various ways to calculate present value and explain when we would use each. We will calculate present values using formulas and algebra, using present value tables, and using Microsoft Excel functions.

We will calculate the issue price of bonds and discuss why the issue price often differs from the par value or face amount of a bond.

The course will cover the journal entry related to the retirement of a bond, both at maturity and before maturity.

We will introduce notes payable, record journal entries related to taking out an installment note, and build amortization tables related to notes payable. Amortization tables help us record the proper transactions when making payments on a note payable and also provide us with a good idea of what interest is, how it is calculated, and why.

This course will discuss adjusting entries that can be used in an accounting system to help simplify the data entry process.

We will discuss how to create the liability section of the balance sheet breaking out current and long-term portions. We will discuss different techniques for recording the current portion and long-term portion of installment notes.

This course will discuss different types of bonds and bond characteristics.

We will demonstrate different methods for amortizing discounts and premiums including the straight-line method and effective method, discussing the pros and cons of each.

This course will describe the differences between a capital lease and operating lease and when a lease must be recorded as a capital lease.

We will also have a comprehensive problem designed to take a step back and think about the entire accounting cycle.

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Transcripts

1. 10 Bonds & Notes Payable Introduction: In this presentation, we will introduce the topic of bonds and notes payable when considering bonds. We usually think of bonds as a form of investment, typically linking thin together with stocks and bonds. We're gonna invest in stocks and bonds, possibly as part of our 41 K plan and part of our retirement strategy. We here are looking at bonds from the other side from the person issuing the bonds, in this case, the corporation. Now bonds can be issued fight by government agencies or corporations were typically focusing here on corporations. How are we going to record the issuance of a bond? Why would we issue a bond? How is a bond used? And the bond is going to be a kind of financing mechanism. So we're trying to generate capital for the business, get money typically into the business for future use. It's gonna be similar to a notes payable when we issue the bond. Basically, the bond is gonna have on its the face amount of the bond, the interest of the bond when the bond interest payments will be made, and when the principal is due, we'll talk more about the details of the bonds and how to record them. But we want to get an idea of it from the company's standpoint, from the issuance of the bond when learning about Bonds. There's a common question, and that is, why do I need to learn bonds? For example, if we're not in a corporation, if we work in some type of other entity other than a corporation, that's not going to issue Bonds, and we don't have to record the issuance of bonds. Why do we need to learn about bonds? Well, one, it helps from the investment standpoint, but to from ah, finance standpoint and an accounting standpoint, it's a really huge topic, not just to record the issuance of bonds or to know what they are, but because they're an introduction to time value of money. So we're always going to be going back to Bonds. You gotta know Bonds because they're one of the major tools that we use within finance to introduce the topic of time value of money, very important topic both in finance and accounting. When considering bonds. We want to think of it in the options of financing options, and the company have different types of financing options. Remember that we're trying here, of course, to generate revenue. That's the goal of any type of business, no matter for a company, a sole proprietorship or partnership. However, in order to do that, we often need seed money. We need capital. We need some money to start off. We need monies to build things, to make things to innovate, so that we can then generate that revenue. And so the question then is How do we get some of that initial funding? So most of the of the money that we get from the company, we hope if you come from operations. But if we need Teoh to get money for some other purpose in order to build grow research outside of the normal operations, then we have the option of possibly issuing stock or having a notes payable, taking out a loan of some kind or issuing bonds. Whenever we think about these items for bonds and notes payable here, we want to think of in comparison to each other because that gives us an idea of what the characteristics are of each of these types of options and why we would use them. How are we going to see them in contrasting two other types of options that we have. The stock options are going to give an idea that we can issue stock and therefore give some ownership in the company in exchange for money for capital. Now there's gonna be pros and cons will talk about a little bit more on the pros and cons of issuing stock. The stock, of course, is only something that can be done for a corporation. A sole proprietor can't really issue stock. A partnership could get another partner and has some type of options with a limited liability partner, possibly or limited partner. But they don't have. It's easier time to sell capital investment as stocks because they're all standardized. The downside, of course, is that you're giving away voting power, power and some decision making to some degree when given away stocks as well as claims to future revenue generation. Then we have the notes payable. Now this is the option that's kind of available to even a sole proprietorship or a partnership, meaning the major type of note is a loan from the bank, and we could, no matter what type of business we have. We can try it to get a loan to finance the business. And there's pros and cons. Of course, to the loan. Are we gonna have interest on it for the con? But the interest is deductible. And the major benefit of alone, of course, is that we don't give up equity interest in the business. And so we're not giving up voting, right? We're not giving up future revenue. Ah, but we're taking out, of course, the obligation of the loan. Ah, Bond, you can think of as similar in many ways to the loan except for many times the bond. Instead of going to the bank and asking for the bank to give us money, we're gonna go to the public and asked the public to give us money so we can actually sell a bond to the public. It acts in many ways, as alone does. In that we're gonna get initial capital investment. We're gonna give the bond which is in essence, a promise to pay something, including principal and interest in some format. So the major difference between these two is that you know, when we think about alone a note payable, we typically have to get that from the bank. Ah company has the had the ability to issue bonds, which will make it easier to generate t do. Typically, it's easier toe issue bonds, and we have more options, possibly in terms of who would purchase a bond and therefore the corporation, due to the enable Teoh sell stocks and issue bonds, has, ah lot greater potential to be able to generate capital and then be able to use that capital toe to invest in the business to possibly generate revenue. So we'll go over the frozen cons a little bit more here, focusing in on the bonds bonds is usually the new thing for most students, thinking it's usually something that's a little bit unusual, little bit strange, we typically have the idea of what alone is. Ah, and so I notice something that we kind of have an idea of stocks we've talked about. Stocks will talk more about stocks in another presentation, but stocks are gonna be an ownership interest, but the bonds air typically something that is a little bit more unusual to people. It's really gonna be really similar to a note, so the bonds are gonna be kind of like a type of note that we're gonna issue. And why are we going to do it? Because we're gonna get money now. We're gonna pay back the bond at the maturity date of the bond, and we're gonna have some interest obligations in some format, whatever the terms of the bond will be in order to pay those. And so you can see that's pretty similar to a note. One of the major benefits to issuing bonds is there's no loss of ownership control and knows that this is a comparison between issuing stocks. So whenever we list out pros and cons between different financing options, we really have to know all the financing options because they're only pros and cons in relation to what the other financing options are. And there's no best financing option. We just need to know one of the related pros and cons and what's best for us in this case. If if we want to keep control of the business and not give away ownership and not give away the potential or the obligation to give future revenues to others through the issuance of common stock, then it would be preferable in that case to issue bonds because we're not giving away any any ownership, interest, any voting rights or any claims to the future revenue beyond the obligations of paying back the bond, Uh, interest payments are going to be one of the major cons. Of course, if we issue stock, we don't have to pay interest payments. We just get the money. We get too invested. We don't know anything until we generate revenue. And we start to give back in terms of dividends because we're gonna owe some of those dividends, of course, to the shareholders with Bonds. However, way we know what we owe back, we've, it's set in terms. Here's the money that we oh, here's the interest. What we owe it doesn't matter what happens in the future. There's no future obligation to pay our future revenue beyond the obligation that we've put in laid out in terms of the bond, and so that's going to be that the difference. The interest, however, is part of that. So we're gonna have to pay interest on the bonds. The good side of that is that the interest is deductible with the normal business expense, so For example, if we were to get 100,000 for the company from stocks, then we would just put that in the business, start doing business and no problem. However, when we start to generate revenue, some of our revenue, then is gonna have to go to those stockholders that gave us the money for the for the business. If we then get 100,000 from Bonds, however, then we have to pay not only the 100,000 back, but we've got to pay interest on it, which is not good. But at least we're not having to pay future revenues to the bondholder. We only have to pay the bond back and the interest on it. So although we're gonna be paying more for that initial investment, it doesn't give future obligations in terms of revenue generation or voting power within the company when we have the bonds. And those interest payments at least, are deductible for tax purposes, which could lower or will lower the amount of taxes that is owed 2. 20 Bond Issued at Par: In this presentation, we will take a look at the journal entry related to the issuance of bonds at par value. When considering the issuance of bonds, remember that what we're doing is we're giving out basically a promise. It's similar to a note that we would have, except that a note is coming from the bank. Whereas a bond we could give the bond to anyone, we could sell the bonds to the public. In other words, Ah, the other difference is going to be that when we talk about a note were typically saying that the thing will change on the note with negotiation will be the amount of the note. Let's say we have 100,000 notes, and then we we adjust the interest rate in order to make an agreement. So the thing that kind of changes within a note for bargaining purposes is the interest rate on a bond. However, if the bond was already produced already made that it is what it is, it's already been. It's already been written out here, so the amount on the bond is fixed. Then the rate is fixed. The amount of the due date is fixed everything is fixed once the bond has been generated. So then how do we trade bonds? If the interest rate has deferred? Uh, if the market rate is different than the bond rate, then we're not gonna be able to negotiate the bond cause we can't adjust the rate Teoh something that will sell. Therefore, what are we going to do? We're gonna change the amount we sell it for. So note what we can't change. We can't change the amount on the bond. We can't change the interest rate on the bond. What we can dio is sell this bond for something different than the face amount. So that's what's gonna be different from bonds and notes now. Ah, Bond could If we made the bond at this point in time and we knew exactly what the market rate was to sell it for, then we would make the rate on the bond equivalent to the market rate, which would be great. And that would be the easiest thing to do would be the easiest general trip to record. That's what we will record now. If, however, the bond had been on the market or there's some type of time delay between the making of the bond and the selling of the bond cause. We can treat these bonds at any given time, then the market rate will differ almost inevitably from the stated rate on the bond. And we're gonna have to then do something if we want to sell it, that something's gonna be to sell it for more or less discount or premium of the face amount of the bond. So if we sell it for exactly the amount of the bond, then that's the easiest scenario. Remember that this only happens if the market rate and the rate on the bond are the same. The bond rate in the market rate are the same. Then we'll sell it for whatever the bond is. Four. So if we had Bonds with the face amount of 240,000 we're gonna get 240 1000 for the bonds, and then we're just gonna credit bonds payable for the 240,000. This would be very similar to just taking out a loan from the bank if we took out a loan from the bank. It doesn't even matter what the interest rate would be because we're gonna pay the interest in the future. It doesn't affect the transaction at this point in time, so the same would be for the bond. If the bond market rate was the same as three rate on on the bond, then we would just issue him, issue the bonds for the face amount of the bond and there would be no discount or premium. And it would just be similar to the journal entry we would have for taking out a loan. We were debit cash. Cash is going to increase, and we're gonna increase the liability that we owe. So cash here started out at 270,000. This is our beginning trial balance. Debits are non bracketed. Credits are bracketed. Debit minus the credits are zero meaning debits equal the credits. Net income is currently at 700,000. This 700,000 minus no expenses. So cash is going to go up from 270,000 debit in cash 2 42 960,000 bonds payable. The liability recording. The other side is gonna go from zero up in the credit direction. Teoh. 240,000. So note the results here. Then we got cash. That's the point. We want to get capital to increase, possibly because we want to produce something or make something to help us generate revenue in the future. So possibly we want we want to buy a new building or possibly we want to put money to researcher development and development. So we're gonna put money into into cash and then hopefully used it to generate revenue. The other side of it goes to a liability because we owe it back in the future. Similar to if it was a note payable, meaning we're gonna over this 240 back at the end of the bond term and we will pay interest . But note the interest doesn't even really matter when we record the bond because it's if the market rate is the same as the rate on the bond, then we're just gonna record interest. As we would like a note, we're just going to record it when it's do we haven't earned it. We haven't incurred any interest yet. That only happens as time passes, so it doesn't even matter what the interest rate is If we issued of the bond at the face amount. We will record the interest as time passes because that's when we incurred the interest. So at this point in time, note that there's no effect on the income statement, no effect on net income. We still have the sales minus the expenses of the 700. 3. 25 Bonds Market Rate vs Contract Rate: In this presentation, we will take a lengthy bonds market rate versus contract rate. Remember that the bond is gonna be similar to a note. It's basically a type of notes, but there's a difference between a normal note that we get from a bank and the bond the note that we get from the bank we will typically adjust with our market negotiation. When we're negotiating over the terms of the note, The thing that we usually negotiate is the interest amount. When we're getting that loan from the bank, for example, if we want $100,000 loan from the bank, then we're gonna haggle over the interest on the 100,000. What rate of interest are we gonna have to pay back in a bond? However, if the bond has already been made, then we cannot change the interest rate and we can't change the amount of the bond there already made. So then the question is, Well, how can we trade this bond if the market rate of interest is different? The contract rate here being different than the market rate well, we can't change the rate. So what we can do is we could sell the bond for more or less than the face amount of the bond. So remember what a bond means. It means just like a note. It says, you know, we're gonna get so much money now and we're gonna pay it back in the future. Whatever term of the bond is, whatever the maturity date of the bond is, plus, we're gonna pay some type of interest on it now. Typically, if we got $100,000 note, we within pay back the 100,000 at the end of the note at the end of the loan, plus any interest on it. This is not the only way that this could work. However, we could, of course, say that we're gonna accept something other than 100,000 now, and we're gonna pay you back 100,000 in the future. In other words, we may say give us, ah, 101,000 now, and we'll pay you back 100,000 at the end of the maturity date of the maturity date of the bond. Or pay a something less than 100,000 now and we'll pay you back 100,000 at the maturity date. Why would you do that? Why would anybody except that because of the difference in interest rates, that the difference is going to be made up by the fact that market rate is currently different than the rate that stated here on the bond? So what would that look like? Well, that's gonna give us three types of options within a bond. The 1st 1 is going to be the easiest option, and that's where the contract rate is gonna be equal to the market rate. So if the contract rate is equal to the market rate, then we can just issue the bond with no discount and no premium, meaning it's gonna be very similar to just a normal loan type of transaction. Because the rate that is stated on the bond is, in essence, correct. You can think of it as being exactly what the market rate is. This would only happen if we issued the bond right at the same time we made the bond and issued it. If there's a time delay between the creation of the bond and the issuance of the bond, it's more likely that the contract rate on the bond will not match the market rate, and then we're gonna have one of these other two scenarios, which could be that if the contract rate, the rate on the bond it's printed on the bond is greater than the market rate and remember that the market rate is kind of an unknown. We know the market based on the market. What other things air doing, what other securities air doing, which are similar to this security and therefore based. So this isn't printed anywhere. In other words, the contract rate is on the contract. It's on the bond. So if the contract rate is greater than the market rate, that would mean that the bond is a good deal. So if we had $100,000 bond and we're going to say that the contract rate on our bond we're paying more interest than other types of bonds are in a similar situation within the current market situations, therefore, we're gonna issue the bond for a premium, meaning if we have $100,000 bond and we have interest on the bond at 10% that were pain, and the market rate for similar bonds is only 5% then we're not just going to sell the bond for 100,000 because we're paying a lot more in interest. We can't change the percentage rate toe 5% cause it's already printed on the bond. What we can dio is say that we're going to sell you the bond for something over 100,000 and therefore what will take more than 100,000 now will make up the difference by paying you more an interest in the meantime, and then we'll just give you the 100,000 back at the end. The other possibility is that the contract rate is less than the market rate, so remember that the contract rate is printed on the bond. The market rate is something that just, we assume, or we figure out what the market is currently doing. So this is an actual rate written down. This rate is what we think. The market rate is based on what other securities in a similar area are doing at the current time. So if this is the case, then we're gonna contract where the rate on our contract is paying less than the market rate and what that would mean. that is, if if we couldn't change the rate, if we couldn't change anything and no one would give us money for our bonds because we wouldn't be able to sell them because they can go somewhere else, give the same amount of money for $100,000 bond and they put the 100,000 into our bond, they would get less earnings, less interest than they could going elsewhere. We can't change the interest rate. We can't increase. We can't say will pay you more because it's already printed on the bond. The face amount and the interest are already on the bonds. What can we do then? Well, we can say we'll accept something less than 100,000 and issue the bonds at a discount. So we'll say, Yeah, we're gonna give you 100,000 at the end of the bond, but we'll accept something less than 100,000 now will pay back 100,000 at the end. We'll accept something less than 100,000 now. Why? Because the interest we're gonna pay you during the time period is a little bit less than the current market rates are, and therefore that will make up the difference between the amount that we're gonna receive now and the amount that we're going to give back at the end. Note that when we talk about alone, on the other hand, the loan, the thing we needed we negotiate on is the market rate. We're going to say, Okay, you want, we want $100,000 we'll negotiate on the amount of interest we're gonna pay back the amount of earnings you're going to get on the 100,000. Because here, again on the bonds, we can't adjust the rate Teoh agree with the market rate. We can't adjust a contract rate to agree with the market rate. The bonds have already been produced. Therefore, the thing that we can change will be the amount of money we will receive at the front end for the bonds and then make up the difference between the difference in the rates, uh, through issuing the bond at a premium or a discount. So just note that these premiums and discounts then are a result of this difference between the rates, a result of the difference between the true rate, the market rate and the rate that's on the bond. The contract raid. So when we deal with these premiums and discounts in the future, how are we going to account for them? How are we gonna mean they're gonna have to go away as the bond is paid off? They're going to relate to interest, meaning we're gonna be reducing the premium in discount and recording it to the other side . The income statement accounts of interest income as the bond is going through the process towards maturity as interest payments are made. 4. 40 Issue bond at a discount%2C calculate%2C and record interest payment: Hello. When this lecture want to talk about the issuance of a bond at a discount, we will calculate and record interest payments on the bond. We will be able to record the journal entry for the issuance of a bond at a discount. Explain the effect of recording the journal entry on the trial balance accounts. Calculate the interest payment, and Amer ties the bond discount using a straight line method record the journal entries related to interest payments and amortisation of bond. Discount explained the effect of recording the journal entry on the trial balance accounts . All right, so we're going to look at this in context of a problem. We're gonna have the information on the left hand side. We're gonna look at a trial balance and post this within context of a trap amount so we can see it in relation to other numbers and see the balancing concept within the trial balance in the trial amounts. We're gonna have a simplified trial balance. We have just a couple assets those assets being cash and accounts receivable. We've got the liabilities account payable than where we are focusing in this area will be the bonds payable the discount on the bonds and then we've got the common dividend payable as it be another liability. Then we have the equity section and one thing in there at this time retained earnings. Then we have the income statement being, ah, sales income and expenses. We just have income over the 700 at this time. That is income, not a lot of the brackets representing credits. And that will give us a net income number which we can use to see what will happen to net income. As we post some journal entries. We laid it to, ah, bonds and bond in interest payments as we go. Also note that debits are gonna be represented without brackets and they're gonna be positive. Numbers and credits will have brackets or negative numbers. This will be a simplified way for us to see the debits and credits. If we work, you add up the debits minus two credits. It would add up to zero. Therefore, the debits equal the credits, so that gives us a nice, simplified way for us to calculate everything we need to see within one page and limit the amount of columns we are going to need to use. So first thing we want to do is just discuss what a bond is, how it is compared to a note and look at our information on the side. So we issued a bond which pay interest, semi annually. It's a 15 year bond. It's a semi annual bond. It's gonna have a face value of 240 and it's got an interest rate of 6%. These are things that are going to be on the bond. So if we were to actually have a physical bond, which we don't usually have these days because it's all electronic. But they would be part of the terms of the bond if we work in a problem. These are the things that you want to think are like set in stone in the bond. We cannot change these things. They're part of the bond. So that means that we are going. We are the issuer of the bond. When we think of Bonds as an individual, we often probably think of it as if we're thinking about investing into a bond. Now it's good to think on both sides of the table. It's often difficult when we think about problems to think on both sides of the table. So in this case, we are the issuer of the bond, and we then are going to pay the bond back to whoever is holding the bond at the end of the period, which in this case is 15 years, we will pay them the face amount of 240,000 and we will be paying interest on the bonds. Whoever is holding the Bond semi annually so twice a year and will be paying 6% of the 240,000 we will then calculate that out. Notice the difference between a bond and a notes payable. That note payable is very similar to a bond where we would borrow money and we would pay it back in in the future. In some format, and most people have experience with a note payable in terms of a car payment or a mortgage payment. And in those types of payments, what happens is we borrow money and then we're going to pay it back, and we pay back both the principal and interest, usually in monthly arrangements. In this case, we are only going to be paying the interest on the note, so that's gonna be the difference. Oftentimes with bonds, bonds could be set up in many different ways. But this is gonna be a common type of bond common type of bond problem in which we're just gonna pay the interest. That means that as we make the semi annual interest payments, we are only pain. I call it like the rent on the money. So if we were to rent an apartment, we pay back just the rent. The use of the apartment. It's not like such as a mortgage where we pay back part of the principal. We don't give back part of the apartment. Each time we pay the rent, we only pay back the use of the apartment similar to if we have borrowing money. In this case, we're borrowing money. We're paying back the rent basically on the borrowed money. We're not paying back any of the principal. The stuff we're using, we're just paying back the interest until the end of the term, In which case, at which time we will pay back the principal of the 240. Also note that two things that change when we talk about loaning money. If you go to the bank and say I need a loan, you can say, Well, I need this much money and they're gonna then negotiate in terms of what the rent should be . What should the interest on the loan be? How much did you pay me in order for you to have the use of the resource being the money and you can adjust the interest payments? The problem on on a bond you want to realize is that the interest payment is set in stone. Remember, that's one of those things that the But you want to think that the bond is already written . So when we issue the bond you want to think, Well, the bonds already written and the bond already has a face amount, it already has an interest amount. So if we are gonna go on a market and and negotiate over a bond, we can't adjust the interest amount, as we would for a note. We need to adjust something else and that something else is going to be something the same thing. We would adjust for anything else we sell, and that's gonna be the sales price. So if we were to sell something a tangible good, then of course we would haggle over what the sales price should be. And if we are selling a bond, it's kind of the same thing we're gonna say, Well, you know, this is set in stone that interest rates set in stone, the face amount of set in stone. But we can haggle over the price that we will sell this four. So in terms of this note, we're gonna say, Yeah, we're gonna pay back whoever owns the note 240,000. We're gonna pay interest at a rate of 6% semi annually. And how much would you like to buy this bond for? And if we put that on the market, then of problems always gonna have to give you kind of a market rate and the interest rate on the bonds of the market rate is kind of it's it's not set in stone. It's, though that's the negotiable with rates. So when you go on to the free market and you try to sell something well, if it turns out that people can buy similar bonds at a rate of 8% meaning they can take their money, give it to someone else and earn rent on it for, ah, higher amount. Just like if I was to take my apartment itself with somebody else and they're gonna pay me more rental, then this person is. Then I'm going to sell it to the person who pays the most rent. Therefore, if the market rate is higher than the interest rate on our bond and we're trying to sell our bond, then we're gonna have to sell it for less than the face amount of the bond. So we'll say OK, you know, you don't have to give us 240,000 for it. We'll give it to you at a discount. So that's the idea. We're going to say, We're gonna give it to you at a discount. We think of a discount versus that premium. It's easier to think of it in terms of if we are the person purchasing the bond, because I think we have more experience with that if you go to the store. And it said the sticker price said something like the face amount in this case is the sticker price and said 240,000 and we paid for something less than 240. We would say that, you know, we got a discount on it. If, on the other hand, we paid more than the sticker price, we would pay a premium on it. Why would we ever pay more than than the sticker price on the bond? Well, that would be, of course, the opposite here. If the market rate happened to be less than the rates on the bond, then we would have to we would be selling it. The issue would be selling it at a premium. The purchaser will be buying it at a premium. And, of course, it either those situations could happen because the interest rates on the market fluctuates due to a lot of different factors. So if we go through here and we think about the journal entry as we issue the bond, so if we're gonna issue the bond here, then how are we going to record this? Remember the reason why a company would issue a bond because they're trying to get money. So we're trying to get money in order to fund whatever we're trying to fund for the business and so is cash affected. We're gonna say, Yeah, cash is affected in this case and cash is going to go up. Cash has a debit balance. We're gonna make it go up by doing the same thing to it, which in this case, would be another debit. Now, the next thing that's gonna happen will, of course, be that. Why did we get cash? Because we promise to pay at the end of the 15 year period, 240,000 plus rents on that money that we borrowed at 6%. So that means that we have signed an obligation to go back the money in the future. That money that we owe back will be at the end of 15 years, 240,000. So the bond payable is a liability. All liabilities have credit balances. We need to make it go up by the amount that we're gonna pay back at the end of the time period, which is 240. So we're gonna credit the 240 increasing the liability that we owe. Also want to point out here that you could get this amount confused, one with the issue with the issue price, how much money we were going to receive and the reason we're gonna We're going to say the bond payables for 2 40 is because that's how much we're gonna pay back at the end of 15 years. It's also common for people to get confused on the fact that, well, we're not just gonna pay the to 40. We're gonna pay the to 40 plus a bunch of interest on top of that. But at this point in time, we have not yet incurred the interest. We've already got this obligation to pay the to 40 because we are currently using that. However, we haven't. We haven't used the money like is the sailors that similar as if we had rent. We can't record the rent expense before we've used the the apartment or the building. So once we use the building, then we have incurred the rent expense. That's when we record that rent expense. So then, of course, we have a difference here. We have the cash that we received and we've got the bonds payable and that will be of the discount. So the difference will be the discounts of the the 1 98 44 plus the 41 5 16 will equal the debits of 2 40 will equal the credit of 2 40 How do we get the 41 5 16? It's the to 40 minus the 1 98 4 84 That's the polling that we need in order for the deputies to equal the credits. Also note, the way that we thought this out is that we thought of cash first like we normally do, and we thought of the bond that we have got to put out. And then we thought of the plug being the discount. That's how I would think through it, however, thinking through it. In that way it means that the discount is a debit and it's on the bottom. If you're gonna record this into a software that's gonna be great in you or something like that, then you probably want to put the two debates on top. If this format helps you to go back and audit the information or help you think through the information, I would think that is more important than having the two debates on top. So be aware of that now? Of course, if we posted this out, then we would say cash has a debit balance. We're gonna increase the cash here by this 1 98 44 And it's gonna go up to 9 18 44 Then the bonds payable. We have a credit balance in the bonds payable. Bonds payable is a liability down here. So it has zero. It's gonna go up by the 2 40 to the to 40 credit balance, and then we have the discounts. But discount is here. There's nothing in the discount. We're gonna debit the discount by the 41 5 16 So know what we have here. We've got the bond payable, which is the to 40 and we have the discount. So that means that the carrying amount of the bond then would be the 240 1000 minus the 41 516 which would be the 1 98 44 That's the amount of cash that we've received Now, A couple things to note. Remember that we're not gonna pay off the to 40 till the end. We will be making interest payments semi annually paying the rent similar to paying the rent on a building. But we also have this discount. And what are we gonna do with that way? We know that at the end of 15 years that discounts gonna have to go away because after 15 years, we're gonna pay back the 240,000. And we can't have this discount like hanging around on the books when there's no bond related to the discount. So we need to get rid of this discount somehow over the time period. So it's, you know, it has to go away somehow, some way. So what we're gonna do is we're going to basically advertise that we're there's a couple ways we can do it. The easiest way is a straight line method. And if the amortisation is in material in that it will not materially affect the decision making than the straight line method would be an easier way to go to Amer ties the discount and it would be calculated similar to depreciation in that we would just take the amount of the discount we're gonna divided by the number of periods and just advertise it at the same period in which we pay these interest payments So in that way we would just write it off. Meaning we're gonna reduce it by crediting the discount. And what are we gonna debit then? We're gonna debit interest on the bond. And that might seem weird. Why do we debit interest on the bond? But remember what the discount is? Why why do we have a discount? Because it's basically a difference between the interest rate and the market rate. So really, the difference is because of the difference between those rates, it really is interest. That is the reason for it. And therefore it's it makes sense for us to write it off to interest as we dio. So let's see what that would look like. So now we're gonna think about us on June 30th record the bond interest and straight line amortization. So now we jumped forward in time, we issued the bond, and now, of course, we're paying the rent on it. We only have to pay the rent twice a year. This is the brand has come up and do at this point in time, so we will then have to pay it. So the first question we're gonna ask well, is cash affected. And in this case, the APP catches. We're gonna pay the rent on the money that we borrowed, and we're actually gonna pay it with cash. Remember that we are only paying the interest portion. We will not be paying the part of the principle, as we would in many types of loan arrangements, like a mortgage or like a car payment. So how we gonna calculate this? We'll, we'll pull up calculator first, and we're gonna take the face amount. Remember, we're gonna take the face amount, not the, uh, not the issue price. This is gonna be the amount that is in agreed upon on the bonds, The part that's written in stone. We already had this saying that we're gonna have to pay the face amount times the interest rate once against the interest rate that's on the bond, not the market rates interest rate that's on the bonds part of the agreement. Times 0.66%. That would give us 14 4 That would be interest for a year. And I want to stress that whenever we think about the interest rate, If I was to say that you know the mortgage rate on the interest is 5% noticed that that means 5% a year, even though we pay the interest on a mortgage, for example, monthly. So we could break down the interest rate to a monthly rate by dividing it by 12. Or we can figure out in this case, as we've done here, what the interest would be if the term was for an entire year, and then break it down to what it's really over, which is only going to be for six months. So six is half a year. I could divide by two, or this would work for any fraction of a year. We could say what's divided by 12 which is how many months or in a year, that's is how much rent we would pay per month. And then how many months have passed since this date to dis the state? Six months, times six, and that would give us the 7002. So that's how we're gonna take a look at the interest here. Now I'm gonna stop there, and I'm gonna calculate the amortization. So that's how much of the cash we're gonna pay due to the interest on the face amount of the loan, which was, of course, the face amount of loan times the interest rate. Now, remember that we have to get rid of this discount. So how are we going to get rid of that? What? We have to lower it. We're gonna have to credit it by something. Let's figure out a straight line method to credit it. So what we have here is we've got a Namur ties. Discounts if we take out our calculator. The face amount of alone. 240,000 minus the Unadvertised discount. But 41 516 Remember? That's the carrying amount. That's how much we bought the, uh how much cash was received for the issuance of the bond. Now we're gonna have to reduce this 41 5 16 over the life. So in order to do that, it's gonna look like this. We're gonna have the advertised amount. 1384 How did we come up with that? Under a simplified straight line method. We're just gonna take that 41 516 and I could say divided by 15. That's how many years, so divided by 15. And that would be how much per year. However, we're doing it semi annually, so this is every six months or twice a year, so that would be for a year. So if I divide that by two, that would be the amount for one period being six months. Notice it is rounded, of course here. So we've got 13841383 point bubba. So we could also do that. A lot of people will think about it this way. We don't want to think about how many years we want to think about how many periods. So if it's 15 years, semi annually, twice a year, times two, that would be 30 periods. So we can just take that same 41 516 divided by 30 periods. But that would give us the same 13 84. And that means that our discount should go down from 41 516 minus 13 84 to this 41 32 and then our new carrying amount. It's always gonna be The carrying amount will be the amount of the of the bond to 40,000 minus the Unadvertised discount 41 32 that give us the 1 99 8 68. So therefore, we are going to credit the discount for the 1384 We're gonna reduce the discount. Ah, here by 1384 And what will the debit to go to then It's gonna have to go to the bond interest. So the debit will be bond interest, Remember? Just like rent on ah, building where credit. We're debuting the interest. Just like we would debit for the use of borrowing anything and we're actually paying in cash. Part of that, the 72 and then the rest of that is the amortization of the discount. Which, of course, is the difference between the market rate and Theo interest rate on the bond. So the 72 plus the 1384 is the bond interest that we will debit. So let's take this journal entry. That's post it and see what it looks like as we do that. So here's the same journal entry. If we were gonna post the bond interest, of course we would be down here. It's an interest is an expense. Expenses all have debit balances. They only go up for the most part, we're going to the same thing to which in this case, would be another debit. So it goes up to here. What's that do to net income? Brings it down. So we had to 700,000 expenses go up. Income goes down. How do we calculate that? 700,000 minus the eight five 84 So this is when the income statement is affected when we expensive opposite, and then the cash here will be the credit. So we have have cash is a debit balance. We're doing the opposite thing to it, which is a credit. So cash is going down, so cash is gonna be reduced and then the discounts or here's the discount. Ah has a credit balance, and we are reducing it. So we're going to reduce the amount by doing the opposite thing to it. And that brings us down to the new carrying a new amount the un Amor ties discount, which we calculated in the prior example. So now we're gonna we're gonna move forward to 12. 31 we're going to the same thing, So it's gonna be a very similar process. Once you calculate the discount on something like this, then it's always gonna be basically the same will go through one more variation of it and it'll be similar as we go. So thinking through it the same way once again, six more months have passed. Now we need to record the interest. We gotta pay, like the rents. Just when the rent has come around on the borrowing of, um this this bond. So we borrowed. We got cash of 1 98 and the bond of horses for the 2 40 So is cash affected? We're gonna say, Yeah, cash is affected because we're paying, like, the rent on the borrowing of the money. And therefore, we're gonna calculate that How do we calculate the interest while we take the face announced? Not the issue price. The 240 1000 times. And the interest on the bond, not the market rate, that one that's set in stone on the bond Times 0.6 And that would be for a year. And we only did it for six months. So I'm gonna do it the other way this time that last time I divided by 12 to give us a yearly total ven multiply time six to represent the six months passed. We could also just say it was half a year, 1/2 1/2. So we can just say, Let's divide by two and say That's the 7002 So cash is gonna go down by the 7002. We also need to think about, of course, the bond pay of the answer and the discount on the bond table that needs to go down. It's gonna go down at an even straight line method, and we already calculated it last time. If we do it again, it's gonna be the same number, just like straight line depreciation. So if we were to think about that, we put the calculator up here and remember what we had then. The original amount of 41516 divided by We have 15 years semi annually, 15 times to 30 divided by 30. That gives us our amount that we came up with. It's gonna be the same each time, and therefore, if the Unadvertised mount was 1 40,032 before 41 30 to minus this 1384 means the Unadvertised amount will be the 38 7 48 And then the carrying amount will always be the to 40,000 bond. Less the Unadvertised discount 38 7 48 Giving us the two to a one, uh, 2 52 which will be the new carrying amount. That means that we're then going to credit the discount. We're gonna reduce the discount because it has a debit balance. We're gonna credit reducing it, and then we're going to, uh, debit, the interest expense. So we're paying the interest expense just like rent. We are expensing the use of the money in this case. And therefore, let's take a look at this in terms of us posting this transaction. So now we have the interest expense once again, same transaction. And if we look at the bond interest, we have the interest expense from last time on the same year, and we're gonna increase that. We're gonna debit it. Expenses always go up with a debit balance. So now it went up to 17 1 68 What did that do? The net income, it brings it down. So here's the net income brings it down. Expenses went up. Net income goes down. How do we calculate that if the income credit 700 minus the expense debit 17 1 68 gives us the net income. Then what happens to the cash? It's gonna go down. We paid cash. Cash is a debit balance. We did the opposite thing to it. Bringing cash down bond discount. Uh, Bond is kind of the debit. We did the opposite thing to it. Bring it down to 38. Notice that this we would keep on doing this, of course, for 30 30 times and at the end of that 30 times, then this bond discount I would go down to zero. And at the end of this 15 year time period, what would happen? We would pay off the bond payable at that time. So now we are now able to record Journal entry for the issuance of a bond at a discount, explain the effect of recording the journal entry on trial balance accounts, calculate the interest payments and amortisation of discount using the straight line method record the journal entry related to interest payments and amortisation of bond discount. Explain the effect of recording the journal entry on trial balance. Macau's 5. 50 Bond Issued at Premium: In this presentation, we will take a look at the journal entry related to issuing a bond at a premium. When considering the journal entry for a bond. Remember what can change and what is the same for a bond. When we think about a bond, it's already been printed. We know the amount of the bond, the interest on the bond, the maturity date of the bond. These are already set. So if we're making a negotiation with the bond after it had already been printed, then we can't change the face amount. We can't change the interest due dates. What can we change in order to negotiate and make a sales price on the bond, we can change the amount that we issue it for. So keep that in mind whenever you think about these bond problems. That's the thing that's gonna differ from my bond to a note. That thing that changes when we want alone is the interest rate. The thing that changes when we want to issue a bond that's already been made is going to be the amount we receive for the bond being different than the face amount of the bond. If there's a difference in the market race and the contract rate. So in this example, we're saying that we issued a bond. Now note that when we think about the issuance of the bond just like a note, we often have more information than we really need. And that could be a little bit confusing for us. Eso Here we have that the number of years on the bond we've got the face amount of the bond and were actually given the issue price on the bond. And then we got the interest rate on the bond and the market rate. Now, if they give you the interest rate, I mean, if they give you the amount that you issue the bond for, then all this other stuff is not even needed, just like it is with a note like I don't even know. I don't need to know the interest either the market rate or the um or the rate of interest on the bond in order to record the issuance of the bond. If it's given to me how much we issued the bond four. Because the interest will come into play when we make the interest payments at a later time as we incur interest as time passes. What we do want to realize just for my theory standpoint, however, is the reason why were issuing the price for 270 when the face of amount of the bond is 240 . And that is because the face amount is what we're gonna pay back at the end of the term of the bond, just like a note. So normally you wish that you would think, Well, we're gonna pay back 240 at the end. We would like 240 now will pay you back to 240 at the end, plus interest. But we're not going to do that because the rate of interest on the bonds difference from the market. Our bond rate, the contract rate is 8%. We're gonna be paying on this bond 8% of the 240,000. But the market rate is only 5% meaning other people could go elsewhere and only get a 5% return. And we're paying out an 8% return. So that means that we're going, we're going to say, Well, that's what we can't lower this toe 5%. What we can do is say, Well, you know, we're paying out More interest in other people are pain. So instead of getting the face amount that 240 if you give us 270,000 now, we will give you back 240 at the end of the time period and will pay you at this higher interest rate to make up the difference. The 8% rather than where what you would get elsewhere, which is just the 5%. So that's the reason for this. But if we record this out, we're just going to say, Well, is cash affected? We're gonna say, Yeah, we got cash. That's why we're issuing the bond where the company were issuing the bond cash as a debit balance. We're gonna make it go up doing the same thing to it. Note. It's always nice to have a trial balance here. So this is just a short trial bounce just to show us something that is in balance as we issue these. So we've got debits being non bracketed or positive credits bracketed or negative debits minus credits equals zero. Meaning deputy equal the credits and the net income is currently 700,000 revenue, less zero expenses. That's that's income, not a loss. So we're gonna debit cash, increasing the cash. That's why we're issuing the bond. And then we're gonna have the bond payable for the 240. Note the difference here we only we gots 270. We got more cash than we owe. At the end of the bond, we only owe 240. So there's a difference, of course. And that's gonna be the 30,000. And that's going to go to what we're gonna call a premium. It's gonna be the premium on the bond. So if we record this, we can see what it's gonna look like. The cash is here. Here it is. On the trial balance is going to go from 277 120,000 up by 272 990,000. The bond is going to go from zero up in the credit direction to 240 and then the premium. So here's the premium is gonna go from zero up by 30 to 30,000. So what does this mean? Then We'll Of course we got cash. That's the point. And then we go back 240,000 at the maturity of the bond. But then we have this other 30,000 That looks, you know, it is part of this meaning the carrying value of the bond, if we add those together, is actually gonna add up, of course, to the 270. But the question then is, well, what are we gonna do with this premium? I mean, it has to go away at the end of the time period, and we're not gonna pay it out at the end. We're only gonna pay 240,000. So as we pay interest payments, we're going to reduce this premium at the same point in time. Periodically, as we record interest payments were going to record it and reduce it as the bond goes through towards maturity in the form of interest expense. This should seem unusual because what's gonna happen is we're gonna have to credit. We're gonna have to debit this to make it go down, and we're gonna credit interest expense, which is weird because interest expenses, that expense, and it only typically goes up. We're not really generating revenue here, but no, What's really happening here? Why is that the case? Will this premium is a result of the our interest payments of 8% being higher than the market rate. So really, what's gonna happen is we're gonna pay out the 8% on the market on the on the bonds here because that's our contract price. But then we're going to reduce it by the premium amount. And so really, our interest payments are going to be closer to the to the market rate Were kind of, uh, putting that difference between the market rate by reducing the premium. So when we record interest expense, we're gonna be increasing it by what we pay 8% and then decreasing. Hit by the allocation of the premium, which is really a result of that difference between the market rate and the contract re also note. Of course, there's no activity on the net income at this time, so it's all balance sheet accounts. We got cash we owe back in the future. We will record the interest as we go through time as we incur interest as the as the money is being used. That's when we're gonna record the interest expense in accordance with the matching principle 6. 60 Premium Amortization & Interest: In this presentation, we will discuss the amortization of a bond premium and the recording of interest expense on bonds. This is going to be our starting point. This is the initial transaction. In order to get the bonds on the books. Here's our data down here. We've got the number of years we've got the face amount of the bonds. We've got the issue. Price 270. We see that the interest on the market rate is different than the contract rate. The result, then, is that cash is gonna be increased by the 270. The bonds payable went on the books for the face amount of the bond, the amount that's on the bonds of the 240 which is a liability. And then we have the premium being the difference. Increasingly premium here by the 30 the 240 plus the 30 is gonna be equal to the 270,000 carrying amount book value of the bonds. Now we're going to go through the process of recording the interest. We could see that this is gonna have 15 year bonds were gonna pay the bonds semi annually, so we're gonna have to record the interest on them, and we're gonna have to reduce this premium in some way as well. Remember, at the end of the bonds were not gonna pay back the 270. We're only gonna pay back 240. So how are we going to get rid of that? The premium on the bond and why are we going to do it in the way we will? We'll start off by advertising the premium using a straight line. The method Note that the effective method is the preferred method for advertising a premium for general accepted accounting principles. But the straight line method will be appropriate in some cases if the difference is going to be a not material. And the straight line method is a simplified method, and it's easy for us to see what is going on. So we'll start off with the straight line method. Later. We'll talk about the effective method Note. What is happening here is we have the premium was a result in essence of this difference between the interest rates. Now, in many problems, this is hard to really understand because oftentimes what's given to us when we record this initial transaction. Is the face amount being different than the price we receive resulting in the premium when we make the journal entry? But we will do the calculation which the bit more complex to see what that difference is. Why does this happen? How would we actually negotiate the issue? Price being different from the face amount and the calls of it, of course, is the fact that the market rate is different from the contract rate. So in essence, then this premium is a result of interest. It's really uninterested difference here. We need to get rid of it throughout the life of the loan. We're not gonna pay it back at the end of the loan. What we're gonna do is reduce it throughout the loan at the same point in times that we make interest payments, which in this case is semi annually or two times a year. So we're going to allocate this interest out the two interest expense during that time period because it really is kind of ah result of the of the interest rates being different . So we're gonna allocated out to the income statement account interest expense as we dio, you can think of this as being similar to depreciation because we're gonna Amer ties it. And that's why the straight line method is it is a nice place to start. So remember, when we have depreciation on equipment, what we typically do for the simplified, easy method to allocate the cost of equipment is to take the cost of equipment divided by the number of periods, typically the number of years or months, and allocate the cost over that time period. Same thing we're going to do here. We're just gonna take this premium and allocated over the time period. 15 years but semi annual payments. So, for example, on January 1st, when we start, we've got the premium of 30,000. That means that the carrying value is the 270,000 which is the 241 on the books for plus the 30,000. That's what's currently a liability on the books. As of the beginning of this process, we're gonna pay the interest on this bond semi monthly. Now here. We're not calculated the amount we're gonna pay. We're gonna catch lengthy amount that we're going to allocate of the premium. So of the premium, we have 30,000 here. 30,000 and we're just gonna divide this by not 15 but 30 because we're gonna There's gonna be 30 time periods. Meaning we have 15 years, semi annually, twice a year. So we're gonna take that and divide by 30 time periods. Ah, the other way you can think about it is if you had the premium of 30,000 divided by the number of years 15 it would be 2000 and then it's twice a year divided by two or 1000. So that means that we're going to take this premium and we're gonna reduce it by 1000 each time period for 30 time periods, which is 15 years times two semi semi annual papers, times 15 years and then at the end of that, then will reduce down 20 So we're gonna have 1000. It's going to take the UNAMET ties Pierre premium from 30 down by 1000 to 29,000. Carrying value now is going to be the 240,000 plus the 29,000 and then we're gonna just keep doing this process the next the next time period that we pay. Six months later, another 1000. It's gonna be straight. So noticed. We're using straight line. So the amount advertised will be the same 29,000 minus the 28,000. And that leaves us with the carrying value, which again goes down by the 1000 which is now the 240,000 bond payable, plus the bond premium of the 28,000. Now, we're gonna record our journal entry to record the interest and to record the reduction over the premium on the bonds. We will record it here. We're gonna post it to our trial balance. Our trial balance is currently in balance because the debates are non bracketed. Credits are bracketed. Debits minus two credits equals zero. Currently net income of 700,000 which is the sales of 700. No expenses at this time. When we calculate the interest, remember that we have 15 years bonds here. We're gonna pay the interest at the contract rate of 8%. How much? That's how much cash is actually going to be leaving the company. So that's where we should start. We're going to say? Well, cash is affected. Cash is a debit balance. We're gonna make it go down. So we know that's gonna be the case. Question is, how much will it go down by? We're gonna take the face amount, Not the issue price, the face amount. We're talking about what's actually physically on the bond here. That's the promise that's on the bond, which is the 240,000. And then the amount of the interest rates that are on the bond is the one on the bond of a contract rate, not the market rate. So we're gonna take this Times 0.8 That's the actual contract. That's the actual bond. The 19 2 is what we would pay if it was paid each year. Then we're gonna take that and divide it by two. That's gonna be the 9600. So this is how I would think of the interest rate. Now there's a couple of different ways you can think of that calculation. I typically think of it of the face amount amount of on 240,000. Multiply times the rate on the bond, which note that remember any rate is, really, ah, yearly rate unless state stated otherwise. So if we say something 8% we usually mean 8% a year. Your borga trait. If we say 8% we mean 8% a year. So if I multiply this times 0.88% I'm gonna get 19 to, which is 19 to how much interest we would pay in a year. It's only six months so we could break it down to a monthly total. We could do that by saying, divided by 12 1600 a month, times six months or we could just divided by two note. The other way you can do it, which is useful for Excel, is to say OK, well, if 20.8 is the yearly rate, what's the's six months rate? We could say every six months is half a year. Or take that and divide it by two 0.4 Must be the monthly rates times the 240,000 to give us that same amount. So a couple different ways to think about it. Just get an idea and remember to know what the interest rate means. It means for a year, typically now the bond premium that we're gonna have to reduce here. We already calculated on our amortization table 1000 per time period meeting. It's on the books as a credit, and we have to know that. And it's helpful to know that if we have a trial balance because we can see him, it's a credit. We need to make it to go down. So we're gonna do the opposite thing to it to decrease it. So we're just gonna kind of like plug this in their into our journal entry. So I know that the cash is gonna be paid here and I know we're gonna reduce the premium to kind of straight line it down to zero towards the end. And then the difference, then, is going to be the interest, which will be the 9006 minus the 1000 or the debit that we need in orderto finish this process. So note that the devotee here are not in order debit and then credits. I kind of built this in order Teoh be able to see how things are going to be put together. Eso you could rearrange it to put the deputies on top or you can keep it like this. It's not quite as proper, but whatever way it helps you to see how the thing was constructed, that's the way I would put it together. So know what happened here is the interest expense is only 8600 even though we're paying cash, which is interest on the bond of 9600. Why? Because the difference between those two is really in essence, bringing the interest rate that's on the bond down to the market rate because we're not really paying 8% on the 240,000 cause we really got 270,000 and we're only paying interest on the 240,000. So that difference is what we're trying to account for, as we as we kind of net out this interest payment. If we record this, then we're going to say that the bond interest expense is gonna go from zero up by 8600 to 8600. The cash is gonna go from 990,000 down by 9600 cause we're paying the interest, and then the premium is gonna go from 30,000 down by that 1000 to 29,000 that now matching are on an advertised premium amount on our amortization table. If we would take this amount and this amount, that's gonna match Arcuri in amount for the amortize it. The effect here on net income, of course, is to decrease net income by the expense. The expense being lower in this case than the actual cash we paid because of the reduction of the premium, which is a result of the differences in interest rates, market versus contract rate. If we do this again, we're just gonna jump forward in time to the next interest payment, which is on 12 1 another six months later. And that's how these bond problems work. We typically have toe kind of jump forward in time. So now we're going to say we've record the same thing. It's gonna be the same transaction. We're gonna say cash is gonna go down by that 9600 which is calculated Ah, in terms of our the amount, we're actually gonna pay face amount 240,000 times that yearly rate. 108 the rate on the bond, not the market rate, and then we're gonna take That would be a year divided by two because it's semi annual. So that's what we're actually gonna pay for cash. We're gonna reduce the premium by the 1000 just like we were going. It's just like if it was equipment that we're advertising and then the difference, of course, is going to go to the bond interest expense. So if we go through that again, we're going to say that the bond interest is going to go up again by Teoh 17,200. We've got the cash going down and we've got the premium going down. So now the premiums at 28 that should match with on our table as a Namur. Ties do, and our interest expense has increased, which brings net income down 7. 70 Bond Price Present Value Tables: in this presentation, we will calculate the bond price using present value tables. Remember that the bones is gonna be a great tool for understanding the time value of money . Because of those two cash flow streams we have when, with relation to bonds. Meaning we're gonna pay the bond back the face amount of the bond, and we're gonna have the income stream and those that gonna be perfect for us, too. Think about time, Value of money, how to calculate time, value of money. Are gold being to get a present value of those two streams? So we're gonna think of those two streams separately, generally and present. Value each of them to find out what the present value of the bond will be. Weaken Do that at least three or four different ways. When you do that with a formula actually doing the math on it, we can do it now, which is probably more popular now do it with a calculator or with tables and excel. I would prefer excel, or we can use just tables, pre formatted tables. The goal here. The real point is to really understand what we're doing in terms of what what is happening , How what can you tell it? What can it tell us and then understand that these different methods are all doing the same thing, so that whatever you're being taught or whatever you have to work with, whether it's just be paper and pencil on a test or in practice where you have a calculator , it's all the same. Type of calculation is coming from the same place. It's coming from the math, of course, but us here are, or how can we apply that now? Accounting textbooks often used tables, so we're often going to use the table. Looks something like this, and the confusing thing about tables is one that just a lot of numbers, so that's confusing. But once we understand them, that's not that bad. The other thing, that's a little confusing. It's just to know which table we need to work with. Remember, there's two different types of streams that we have here, Um, and one is going to be doing with the present value of one typically called the present value of one or equivalent to this formula. So the table's gonna have the time periods. It's gonna have the rates that's gonna look the same on any of these kind of present value , our future value tables. What's gonna different? We've got to make sure that we look at the name of the table and are picking up the correct one for what we're doing. So if anything says future value, that's not the one we want Right now, we're not trying to calculate what the future value is. What we're trying to do is calculate what the present value is so you can eliminate those two tables and you're left with ah, present value of one or present value of an annuity when you're considering the present value of just one payment, such as the bond payment that were gonna pay back 100,000 at the end of four time periods or two years. We know that the president values gonna be less than the face amount of the bond if we're gonna pay 100,002 years from now. In other words, the current value today is going to be less than 100,000. So if you just look at this table, you could say, Well, this makes sense because I have to multiply that times something less than one in order for the payment to be something less than the amount that we're paying out, because time value of money would state that the amount today is worth less than the amount we actually pay out two years for now or four time periods from now. So this, then is the table will use when we do the face amount of the bond calculation. The other components of the bonds that will have to deal with in terms of present value in is the interest component. We're gonna pay interest, and we're gonna pay interest every six months in this case, 4000. So we're gonna pay 4000 each six months for four times, and that's gonna be an even. We call that an annuity, So we're gonna have the present value of an annuity type table. It looks really the same because we're gonna have the same periods. We're gonna have the same interest amounts that will be using to figure out what their rate , what this amount will be will be using for a calculation. However, if you look at the table, of course, you've got all these numbers that are greater than one now. And if you think about it, that, of course, makes sense. Because if we're talking about an annuity we're trying to present value on annuity that what we're doing is we're saying, Well, there's 4000 that's gonna be paid four times in this case every six months for four time period, so it would multiply that times four in dollars were actually gonna pay 16,000 so it's gonna be something less than 16,000 but it's gonna be something greater than 4000. So what we're gonna do here is we're gonna take the 4000 have to multiply it times something, and we would expect the result to be something less than 16,000 more than 4000 less than 16,000. And so that would make sense that these numbers, of course, are greater than one in order to get a calculation that would make sense. So if we do this, then we're going to say, Okay, well, how can we figure this out? First, we're gonna take a look at the face amount calculation. It's the same calculation we we did with the formulas. We have to think about the face amount calculation we're gonna pay at the end of the time period and then the interest. So if we take a look the face amount calculation, we're gonna pick up the amount from the table for the present value of one. The amounts that are less than one and we're picking up 5% and up four periods. Why, it's two year bond and we're gonna pay its semi annual. So just remember, make sure that you don't pick up once a year. We're paying every six months. So if it's two years and we paid twice a year than we have four time periods, where does the 5% to come from? Well, the market rate and we will be using the market rate here to present value things cause were present valuing. Using the market rate is 10% and that would be for per year. But we're paying every six months, so we're going to say there's four time periods, and this six month rate then would be the market rate divided by two. This is often one of the most confusing components, by the way, so just make sure toe think through that every time we see an interest rate it means per year divided by two. So then we're gonna take the bond face amounts 100,000. We're going to just multiply it times that rate. So they've done the math for us here and broke it down into just this percentage. And so all we have to do is take that times the percentage we get, the 82 to 70 that wouldn't match the math if we did the math to do the same thing. So all that means is, of course, that we've got 100,000 that we expect to pay for two years from now or four time periods for six month time periods. Then, if that was the only thing happening and we weren't paying any interest today, we would expect to get 82,000 to 70. In other words, if I was just gonna pay 100,000 at the end for money today, then you would think the market would say I would get 82 to 70 from somebody today willing t give me 82 to 70 for me to pay back 100,000 at the end of four time periods or two years . Then we have the other component which is gonna be having to do with the interest which were paying 4000 which is 1000 times to 8%. So we're gonna pay interest of 100,000 times 80.8 That would be the yearly rate stated on the bond divided by 2 4000 That's what we're actually gonna pay every six months for four periods. Two years. So we're gonna use our our table again. But this time for an annuity and you could tell it's an annuity table because they're greater than one. The amounts are greater than one, and we're gonna pick the same area that 5% 4 periods for periods, two years, times two for semi annual 5%. Because we're taking the market rate now and we're dividing it by two so that it's not a yearly rate, but a per six month rate. And then we'll just take our interest per period 4000 and just multiply that times the 3.5460 They did the math for us. That's the point of the table. And if we get multiply that out, we get 14 1 84 In other words, if if we wanted to get money today and we're said we're gonna pay back 4000 each time period for money today we're gonna pay back 4000 times 4 16 We would expect to get 14 1 84 today in order to pay back 4000 every six months based on the current market rate. So the bond has both of those components. It has the face amount we're gonna pay back worth 82 to 70 in today's dollars present value and the 4000 we're gonna pay back in an annuity every for every six months. $16,000. And that's worth 14 1 80 form. Of course, if we have those two up 82 to 70 the 14 1 84 we get the 96 for 54 54. So then the journal entry would just be. If we issue this bond, we're gonna get 96 4 54 for its and we're gonna put the bond on the books 100,000. That's what we owe at the end of two years. The difference then, is that discount 5 3046 So of course the cash is going up. Were saying the bonds going on the books for the 100,000 and then we discounted it by that 5 3046 So the actual value the bond is 100,000 minus the or the carrying value the book value of minus 3005. 46. 8. 75 Bonds Present Value Formulas: In this presentation, we will take a look at present value formulas related to bonds. One of the reasons Bonds is so important to accounting and finances because they're a good example of the term of present value of money. We're trying to look for an equal measure of money when we think of Bonds and bonds is gonna have this relationship between market rates and the stated rate, which helps us to kind of look through and figure out these types of concepts. So even if we don't work with Bonds, in other words, if we're not planning on issuing bonds or buying bonds or known anything about bonds not being important to us, the time value of money is a very important concept in bonds is gonna be a major tool to help us with that. Why is bond so useful for learning time? Value of money? Because there's two types of cash flows with bonds, meaning at the end of the time period, we typically are going to get the face amount of the bond, the 100,000 similar to a note, and then we've got the interest payments that are gonna happen on a periodic basis, and therefore we have these two different types of cash flows that we can use to different formulas for to think about how to equalize. So know when we think about time, value of money. What we're doing is we're just basically saying that we want a unit of measure. That's what money is a unit of major. We're trying to measure value. But unlike any other unit of measure, most others like a ruler, the time value of money or the dollar, the value of the dollar changes. So our ruler kind of changes in size as we're trying to measure value with it. And that would be similar to our our ruler changing in size when we're trying to measure how they a table is. So it changes with time. So therefore, for us to really major something, we have to know what time period were in what time frame are we end. So when we consider something we have to say, Well, here's the value of money at this certain time period, so in terms of a bond, then we have two types of cash flows. One, we have the 100,000 and we're going to say that it's going to be doing this case at the end of four time periods. Why? Because it's a It's a two year bond were going to say its semi annual payments. So that means it's gonna be four periods out, not years but four periods. And then we're gonna have the amount of interest that we're gonna pay on a semi annual basis, and that will happen periodically. So we've got the 4000 interest happening each of those four time periods. So we have two types of cash flows happening here. We've got we're gonna pay out the 100,000 at the end, and we're gonna pay out 4000 each paper that 4000 being calculated as the 100,000 times the stated rate. The amount on the bond 0.8 That would be for a year divided by two because it's semi annual 4000 each each period or each six months, those are gonna be our two flows that we have now. Our question. Here's what really is the value of the bond and we typically want to know the value of the bond now, today, not at the end of the bond, so we don't want to know what the cash flow is. That would be easy for us to calculate. Its be the 4000 plus the 4000 plus 2 4000 plus 2 4000 plus the 100,000. That's how much cash is going to go out. But the units of cash differ. The value of cash differs depending on what time frame we are in. In other words, this 4000 year from now is worth less than 4000 today. This 4000 this would be six months from now. 4000 year from now would be worth less than 4000 today, 4000 year and 1/2 would be worth less. And this, um, two years out that we're gonna get the 100,000 in the 4000 is going to be worth less than 104,000. In other words, we would rather have the 104 today. Why there's two. There's two factors. One is that we know that there's interest. So the value of purchasing power were actually go down. And two, there's opportunity costs we could have put if we had that money now we could put it somewhere else. And therefore, the fact that we could put money to work means that it's worth more today than in the future. So for those reasons we got, we got a present value. This information, we have to take these cash flows and somehow put it into the present value. Now there's two types of ways we can do that one. We could try to take each number and bring it back to the present. And we will do that with this 100,000 because there's only one payment which is two years out or four payments out. So we're just gonna take that 100,000 and present value it. But here we'd have to take the 4000 which is one period out or six months in present, value it and then present value this 4000 which would be a little bit different. This is gonna be worth a little bit less in terms of present value dollars because it's a year out or two time periods, and then this is a year and 1/2 out. It's gonna be worth a little bit less than this 4000 so because they're all the same, we call that an annuity. The payments going to be the same. We can simplify the formula and use an annuity type of formula to do that. There's a couple ways we can do this in practice so we could do that with a formula. We can do this with Excel. We could do this with a financial calculator or we can do it with tables. It just depends on the course on how you you know how they display that, what tools you have to work with it. Clearly, To me, Excel is probably the easiest thing to use or financial calculator the formulas what we want to start with. However, in order to see how these air kind of derived with the work doing so we won't try to derive the formula will just show you Here is the formula that we will be working with. So you could If you're in a situation where you have to just work with a formula, you could memorize the formula. If you're obviously working in practice, then you're gonna be using most likely excel or a calculator To do this. We'll look at it with a formula first. And then look at the other tools. Note. Of course, What we're doing, what you want to know is conceptually what is happening. Uh, why are we doing this? What does it mean? What can it tell you? So here's gonna be our present value formula. We're gonna take the future value divided by one plus the rate or interest to end, which is gonna be the number of time and then the present value foreign annuity. It's gonna be a bit more complicated. We're gonna take P or the value that of the bonds now the payments. And then we're gonna take one minus one plus R to the negative in over the rate. So this would be the math way to do it again. We could kind of shortcut this with a calculator or excel, But let's or tables. So let's look at the concepts of this. So we're gonna take this formula, we're gonna plug our information into this formula. Present value, often recorded of PV of one is kind of a form of that we are doing here. We're gonna apply this more simplified formula just to the face amount that we're gonna pay out. If we're issuing the bond and we're gonna paid at the end, we're gonna pay it out at the end of the time period. The 100,000 in this case being four time periods because it's two years that were gonna pay this out two years in the future, and it's paid semi annually. So if we plug that into our formula, then we're just going to say that the future value is 100,000. What does that mean, Future value? It means that this 100,000 is how much we're gonna pay out after four time periods at the end of two years. But that's future values, not that's not what it's worth right now. That's how much we're actually gonna pay in dollars. But it's not the value now today, so that's the future value. If we divide that by, we're gonna play the rest in one plus 0.5 Where does that come from? Well, we have a market rate which we're gonna used for this calculation, not the stated rate. We're gonna use the market rate because that's the That's the market rate and we're gonna divide it by two because we have the rate is per year and we want to make it for six months . So we're gonna take that market rate, we move the decimal over 10% divided by 2.5 and then we're gonna take that out to the number of periods form. It's two years. There's two payments per year. So this is our our math that will have to work out Now. I recommend not doing this in Excel if you're gonna do it like a formula here because it's easier to write it on paper even if you have it. So it's often easier to write something like this in paper and just do the algebra meaning do one step at a time. We're gonna add the, you know, the one plus point of 500,000 divided by 1.5 to the fourth, and then we're gonna take the 100,000. We do the math here. We got 1.216 rounded, and that will finally get to the eighties 2000 to 70. That means that this 100,000 that were gonna pay out two years from now or four time periods is worth present value in today's dollars on Lee 82,270. So if this was the only thing that was happening, meaning we're gonna pay out 100,000 in the future and there was no interest involved, then we would expect 82,272 day in order for that to be a fair transaction. But that's not the only thing that's happened, and we're also paying out interest. So let's do the same thing for the interest calculation now. We could do it one by one. We could take the interest for 16 month period the 2nd 6 month period. But it's easier to use an annuity. Maybe not with this formula. But if we have a excel or a calculator or tables, the annuity table will be faster than calculating each payment, especially if it was a long annuity. So this is going because all the they're all the same, we can use this formula to calculate the annuity, so we're gonna take the 4000. Then we're just gonna plug this information into our our formula times. That's P. Times one minus one plus 10.5 Same 0.5 Market rate divided by two to the negative four. Why negative. We're just gonna flip the sign. Basically, we're putting negative. Teoh, flip the sign of this. Ah, final result. And we're gonna divide it by 40.5 The rate once again. 10% divided by two. That's our formula. If we just do the mouth algebraic Lee, write it down to do the map. I wouldn't recommend doing an excel. You want to write it down to one step at a time, So we're gonna add up these enter columns one minus point of five to the in to the negative four, and then we'll do the math here and get the 0.18 rounded, divided by 0.5 times the 4000. Of course. And both of these and that if we finish up the math, we're gonna say 4000 times the 3.55 dividing this out. And that, of course, will be the 14 1 84 So you know what? This means? That we had four payments of 4000 meaning we're gonna pay 100,000 times. Ah, the 0.0 eight. That somewhat divided by two. That's how much we're actually going to pay four times, times four. So we're actually gonna pay 16,000 at the end of this time period. We're gonna pay 4000 every six months, four times, But it's not really worth 16,000. It's worth 14,000 184. So if the only thing we were doing here if were weren't paying 100,000 and we were just going to pay back 4000 each year, each six months for for two years or four time periods, we would expect 14,000 1 64 today in order to make those payments in order to have a fair transaction and negotiable marketable transaction note. When we calculated the interest of 4000 we used what we're actually gonna pay. When we used this calculation, we're gonna use the market rate because that's what the market is doing at this point time . So if we if we add those up, then the we're gonna pay back 100,000 at the end of the time period, that's worth 82 to 70 today, and then we're gonna pay 4004 times every six months for two years for two years, that has a current president value of 1 14,084 for a total of 96 4 54 Therefore, if we were to issue this this bond for 100,000 were going to say we want money today. We're gonna give you 100,000 at the end of two years and we're gonna give you 4000 every six months for that two year time period. How much would we want for it? Today we want to 96,000 454 according to the market rate of 10% at this time. Therefore, the journal entry would just be that cash is going to be that 96 4 54 that we just calculated. The bond is going on the books for 100,000 and then we'd have the discount of 5 3046 so cash would be going up. That's why we issued the bond, the bonds going on the books for the 100,000 that we owe. And then we discounted it by the 5 3046 in order to equate it to the market value. So this credit, what we owe minus the discount is the carrying value kind of the book value of the bond. 9. 90 Bond Price Excel Formula: In this presentation, we will calculate the bond price explaining how this can be done using present value formulas within Excel. Remember that the bonds is gonna be a great tool for both accounting and finance to describe the present value calculation. So that's why it's gonna be used often times that have to cash flows related to its one's gonna be the face amount of the bond that's gonna be due at the end of the term of the bond . In our case, it's going to be two years, semi annual or four time periods, and the other is the flow of interest. So if bonds are a great example, because they have the two types of present value problems that we need in one area. So even if you're not in an area where you're dealing with bonds all the time, they're still going to be used and useful to understand present value types of calculations . So here we've got the bond is gonna have one cash flow of 100,000 at the end of four periods or two years, and we need to figure out what the present value is in order to price it back here at your at time period zero. And then we have these four payments in terms of the annuity 4000 and we need to take those and present value them. We could take each period and present value each payment in present value it. But the easier thing to do is to present value on annuity when it's applicable and present value. The one amount when it's applicable and therefore think of that about these is to basically separate cash flows, that we're gonna have a present value separately So we can do this multiple different ways . And it just depends on what, uh, what tools you have and where you are, and I would know how to do it. What you want to know is just that there's different tools to do it. Any time someone uses a different tool, what are they doing? The same thing. And when can do you apply these tools of what's actually happening here? So that's what's actually happening. Were present valuing this information, we could do that with a formula. We could simplify this process by using a calculator or using excel as well do here or tables. It's all the same stuff that we're doing. Just be aware of those different kinds of ways you may be asked. Do it depending on what you're you are few taking a test. Typically, they give you tables of within accounting test. If they're not as nice to you, they'll make you do the math. If they If you're somewhere not taking a test, of course you will have excelled hopefully or ah, or a calculator to do this information. So the present value within Excel What we're gonna do is we're gonna We're gonna do this two different ways again. We're gonna take the present value of the payment that's due at the end of the former four time periods or two years, and then we're gonna present value the interest. So to do this, where if we have excel, we're just gonna go to the formulas here. We're gonna do this by rather than just typing in the formula by going to this insert functions which will give us a formula box and make it a little bit easier. Some descriptions we're gonna type in present value and then get present value. That's what we're looking for. If you type in present value the entire word present value. Then you'll still find the same formula. And that's gonna be the present value formulas explains down here. That's the one we want. So we're going to say OK, and then we'll just enter our data here and it'll give us some descriptions as we go through each of these down here. If we click into this item, it will give us a description. But we're just gonna enter our data. So the rate is the first thing it asked for. We want to take the rate of 10% because we're looking at the market rate, the present value, this thing and we're gonna divide it by two. So 20.1 our 0.1 10% divided by two to get the market rate for a semi annual period. And then we're gonna take the number of payments, which is going to be four. And that's gonna be that two years and we're gonna pay every every six months, still will take that and multiply it times to to get four periods. So that's the confuse most confusing thing. Here is where we're saying four periods, not four years, every six months and therefore they dearly rate is not 10% which is given but 10% divided by two because it's ah rate for every six months rate and then we're gonna take the future value. That's what this is now. The most confusing thing about this formula is that we use the same thing for an annuity and for a present value off one. But it's the difference between these two fields that we use. So we just kind of know on the annuity tables, when we looked at tables, we had different tables that were used in Excel. We're going to say this number here represents payments How many payments we make. So if it were an annuity, as we will see, when we do the interest portion, we would put payments here. But in our case, we're only making one amount at the end of the time period, one payment in our case at the end of the time period. But we're really just trying to present value one amount. So in other words, we know the future amount. We know what we're gonna pay at the end of four time periods or two years. It's 100,000. That 100,000 is the future value because it's the actual dollar amount at the end of four time periods. So we call that the F B or the future value. So that is what we have noticed. That this is a required field because it's highlighted, it seems like so it looks a little. It's a little confusing to use this, whereas this is not highlighted. And therefore you would think it would not be required field. But in this case, because we're using the same kind of box for excel to do present value of an annuity or one , these two are the most confusing components. So this is how we're gonna do this. We're going to see the calculation. It actually does it for us down here, and that will give us the idea. Of course. Then if there was nothing else going on, if we're paying out 100,000 at the end of the time period and there was no interest than we would expect to get 82,000 to 70 now for, ah market a fair market transaction, so that would be the 82,000. Now, if we hit okay, here. You could type this just in excel and it would look like this. It's worth going through here and looking at this for sale, it's equals present value, that will be the formula and then brackets. And if we click on this item, it'll give us the rate, which we had. 0.0, I mean, 0.1 divided by two or 5% and then comma, just like it says here. And then we're on here. Number of periods, four and then two commas. What? What is going on there? That means that we're skipping over the payment. Remember, we didn't have a payment so we could put a zero in there, or just two commas, that it's nothing. And then we put the negative 100,000 that negative just to flip the sign. That's the only reason you have a negative. Otherwise, it would result in a negative answer. So it has a positive answer. It would be negative. Okay, so then we put the 100,000. Thank you's with the 82. Okay, so then we have the present value of the annuity, which is this form, this formula. We're gonna do that in excel. Same thing. We go to the same place. But this time we're gonna take the rate Same rape, 10% divided by two same number of periods, four time periods and then the amount that we're gonna pay is the 100,000 times 0.8 the stated rate on the bond divided by two. Because we're paying it every six months. That 4000. That's how much we're gonna pay every six months. It's not the future value this time. It's an annuity payment that stands for payment. So we're gonna pay that each of those four time periods. That's what this is saying. There is No we don't need the future value or the type. So this is the trick between these two. This is the trick. And knowing that the number of payments does not mean years but payments and knowing that the rate has to be the rate per period, not per year, then we're going to say OK, and then this will be our present value formula here is gonna get us the 14 1 84 which makes sense because we're gonna pay 4004 times, which would be 16,000 if we present value it we expect an amount greater than 4000 less than 16,000. If we see the formula in this format, we got present value times the rate 0.1 divided by two and then we've got the number of periods four and then the payments we have this time 4000. We don't have any future value or any type not needed. And that's what gives us our calculation. So if we add up our components, then we've got the present value of 100,082 to 70. The present value of the payments 14 1 84 or present value 96 4 54 Now we're gonna do this one other way that you could easily do in Excel just to give us a better idea of what's happening here. We could try to present value each time period, which is an easy thing to Dio when using formulas in excel and it's it's gonna be something that hopefully makes it look a little bit different. Be able to see things from a different angle. So we're gonna put the number of periods here, and we're gonna try to say, What's the cash flow happening and then present value each time period and you'll see we'll get to the same result here. So we're going to say that the bonds in period one at the end of the first year there's no cash flow happening the interest. However, at the end of Period one, we're gonna pay 4000. Now, the period one is every six months. So after six months after the first period, we're not paying back the bond. We are paying interest. So the total zero plus 4000 is 4000. Now, if we were to present value just this 4000 not doing in annuity, but just present value each time period at the end of six months, we use the present value formula to present value one at the end of this time period. And we would bring that that would be worth 3810 If we did that for period to six months later, one year later. Now we'd say the bonds. Still, we're not gonna pay back any bond, no cash flow there. We are gonna pay 4000 at the end of of your two again. And that means that the total zero plus 8000. If we were to present valued this 4000 at the end of one year or 26 month time periods, it would only be worth 6 3028 This is easy to do with with a formula in Excel. So and then, if we go in three and it's the same Ford formula, the present value formula, we can copy it down. We don't even have a type it in there again. And then we've got the bond. We pay another four thousands of a total zero plus 4000. But this 4000 at three years or a year now, at three time periods or a year and 1/2 it's only worth 4 3055 So, of course, the values going down as the time period increases from time zero where we're at now and then, period. For now, we're gonna pay back the bond because that's the end of two years, 100 thousands gonna be paid back. Plus, we're paying that 4000 of interest that we pay every six months. So total, then 104,000. If we if we present value this whole 104,000 which is four time periods out or two years. It's only worth 5 85,061 So if we sum this up, then we're going to say that cash flow is 100,000 that were gonna pay back at the end of the bond 16,000 that were gonna pay in interest in dollars a total of 116 which could be calculated here or here to get that 1 16 and then the president. Value, however, is the 3018 plus two six 3028 4 3055 85 5 61 or that 60 or that 5 96,045 This is often a useful way to see it in excel. Easy to do in excel. When doing things by hand, however, you'll notice more tedious for us to present value each year. It's easier for us to present value the annuity portion using an annuity table and then present value the bond portion that's gonna be due at the end of time, periods separately and then add them together. If you're using Excel, this is nice because you get to see the cash flow on a yearly basis and present value on ah , yearly basis. So again, that the transaction is just gonna be cash is gonna go up. When we record this, we're going to sell it for 96 4 54 The bond goes on the books for the 100,000. That discount is the difference. 5 3046 Cash is increasing bond on the books discount carrying value 100,000 minus the discount. 10. 100 Bond Retirement: In this presentation, we will discuss the journal entries related to the retirement of bonds. The retirement of bonds just means that we're gonna pay off the bonds in some form or another at some time or another, meaning the bonds are going to go away. Typically, that will happen at the maturity date at the end of the bond. So, for example, if we have a bond on these terms with the face amount of 240 the issue price of 1 98 4 84 15 year bonds, they're gonna be, ah, semi annual What? What happens when we put this on the books? We would put it on the books as cash we got for that 1 98 the bond payable on the books for 240 then a discount. And then, of course, over the life of the bond, we would be paying interest for that 15 year time period two times. That's 30 payments. And then at the end of this, we would also be amour ties, ing out the discount to get rid of it, to make it go away to the interest and then, by the end of this time period, the discount would be zero, and we would only be left with the bond on the books. In other words, at the maturity date, we would have something like this on our trial balance. The discount is now zero, and the bond is on the books at 240 which is the face amount of the bond. If it were a premium, it would be it would be the same in that we would be left with just the bond amount and the premium would be gone to zero. And now it's just like anything else that we don't have to deal with interest at this point or anything else. We just need to close out the bond. And so it's just like any other liability. We're just gonna pay at the maturity date. That's how we're gonna retire it. So this is a 240 credit. We're gonna make it go down by doing the opposite thing to it. A debit, and we're gonna pay cash. Cash is the debit balance. We need to make it go down. So we're gonna credit cash. So this is gonna be our journal entry will debit the bond to make it go away and they will pay off the cash when we post this. Then the bond payable will be here. It's gonna go. It's Ah, credit. We're gonna debit it, making it go away to zero, and then the cash has a debit balance. We're gonna credit it, making the cash go down. So it's a pretty straightforward journal entry. The only confusing thing about this journal entry is that it happens at the end of the bond terms. So when we're talking about book questions, we often don't get asked it because usually we're concentrating on how to calculate the interest, how to Catholic to face amount of the bond, how to record the bond had advertised the bond discount or premium. And we don't really typically get all the way to the end of the bond, the retirement, the maturity date to record the in transaction often times. And it's a pretty easy transaction if we were to do that. So and it's a lot easier to if we can actually see the trial balance. When you see the tribe bounce, you say, Oh, there's a liability there. We're gonna pay it just like we would if there were no payable at this time. It needs to go down and they were gonna pay it off with cash. Now, it is possible for us to have a colorable bond that we're going to retire before the end of the bond date before the maturity date. So, in other words, in this case, we have the bond on the books of 240,000 and we have the discount of 3 38 7 48 And therefore, if we were to calculate the carrying amount, we have 240,000 minus the 38 7 48 or two A 12 52. This to a 1 to 52. Is the carrying amount of this bond payable? This is something that we owe in the future. If we can pay it off at this point in time for some cash, that's gonna be it less than this amount. Then we're gonna have a gain resulting in a gain. And if we are it paying it off early for something more than this, we're gonna have a loss. So let's see what that's gonna look like. The gain or loss can be confusing here when we're talking about Ah Bond, it's easier to get to that point by just doing the journal entry. So if we have all this information, especially if we have the trial balance because then we can see what accounts are debited and credited on the trial bounce or which accounts have a debit or credit balance, then it's a lot easier for us to construct the journal entry. So the first is gonna be given to us. We're going to say that the cash that we're paying is 230,000. That's gonna have to just be given in the problem because that's the callable price. That's how much we're able. Teoh purchase these bonds for So cash is going to go down because, remember, we are buying them back, basically or were paying them off early before the maturity date, so it's gonna be 230. Then we're going to say that the bond payable has to go off the books Now the bond PayPal's on the books at 240,000. We could see it's a liability. It has a credit balance. So to take it off the books we do the opposite thing to it. A debit for whatever it needs to be to make it go to zero. The discount. Same thing we need to do whatever we need to do to make it go to zero, because it's got to go away. So when we construct the journal entry, we just know that we just got to do whatever we need to do to make it go to zero. If you have a trial balance in front of you, that's easy to do because we can see the discounts on the books at a debit, and we need to do the opposite to make it go down, which is a credit. If you're looking at a book problem that doesn't give you a trial balance and just tells you that the bond is on the books at a discount, then you gotta think through it in one way. To think through it might be to say, Well, the bonds is a liability. It must be a credit. That discount means that we're making the bond go down because it was, you know, it must be decreasing. We're having it less than the state that face amount the sticker price. And since it's a credit, the thing that makes a credit go down would be a debit. So that discount must be a debit because these two are really combined together. And a discount means that we were really the net of the two or below the face amount price . So this must be a debit. If it were a premium, then this amount must be increasing or greater than the face amount. And it would be, ah, credit normal balance. Once we know that this is a this is a debit normal balance for a discount and then we can do the opposite thing to it. Credit it to make it go down. And then, of course, we just need to figure out what the difference is. We've got credits of 230 1000 38 7 48 minus the 240. Debit means we need a 28 7 48 debit. And that, of course, in this case I'm going to say it's a gain loss account here because it could have gone either way. But if it's a debit here, then it's on the income statement that's gonna be, ah, loss, and you just gotta basically start to be able to recognize that. Why would that be a loss? Well, you can think through that. You know, we paid 230 versus the carrying value. Or you could also just think, Well, if it's a debit on the income statement, it's acting more like an expense, meaning expenses have debit balances. They go up in the debit direction and they bring net income down. Revenue has a credit balance. It brings net income up. This is acting like a, um, on expense because it's a debit balance. If we debit the income statement, it's gonna make net income go down. That means it must be a loss rather than a gain, which you, we would think, would make net income go up. So the other way we can think about this is toe is remember, the carrying value is gonna be the 240,000 minus the 38 7 48 So this is kind of a value that we owe on the bond and it's a liability. That's kind of the value we owe. And we paid more than the value that we owe So that's gonna be, ah, loss in this case, and that's another way you can think through it being a loss. So if we posted this out, then we're going to say that the gain or loss 28 7 48 is here, making the income statement accounts go up. Kind of like an expense bringing it and come down. The bond payable will be posted here. It's gonna make the bond payable go to zero. That's why we are retiring. It's making it go away, and then we've got the discount. It's gonna make the discount go to zero because we're retiring it as well. And then the cash is gonna be here. Cash is going to go down, so there's gonna be our transaction. We have the bond payable on discount going away, which has to be the case if we're retiring the bonds. The cash is going down for the early retirement, and we resulted in a loss in order for us to be able to retire the bonds early 11. 110 Notes Payable Introduction: In this presentation, we will introduce the concept of notes payable as a way to finance a business. Most people are more familiar with notes payable than bonds payable, the note payable basically, just being a loan from the bank. Typically, the bond payable is a little more confusing just because we don't see it as often, especially as a financing option. From the business perspective, we often see it more as an investing or a type of investment. But from ah, loan perspective, it's very similar in that we're going Teoh receive money to finance the business. If we were to issue a bond or if we're taking a loan from the bank, and then, of course, we're gonna pay back that money. The difference between the note and the bond is that one. The note is something we typically take from the bank, whereas it bond is something we can issue two individuals. So a bond we could have more options in terms of issuing the bonds than we dio for alone. Typically, when we haven't alone, we typically are gonna have less. Resource is we can take a loan from the bank when we pay back the bond. We often think of the bond ist two separate things. That we set it up is to separate things. Meaning we have the principle of the bond that were gonna pay back at the end. And then we have the interest payments work. They're kind of like the rent on the money that we're getting. We're getting this money. We're gonna have to pay rent on it, just like we would pay rent If we have got the use of any physical thing and that's gonna be the interest for a bond, we pay interest, just the interest as we go typically. And then we pay back the principal at the end. So we kind of separate the two. We separate the rent from giving back the original principle. We could do that for a note. Note that a note has a lot of flexibility alone, has a lot of flexibility. We can set it up in many different ways. We could set it up in such a way that we're gonna pay back both interest and principal at the end of the loan. So that would be one common way to set up alone, Meaning if we got this money today, we might say Hey, we're not going to pay back The loan is set up that whenever it's do, if it's due within five years, we're not gonna pay anything until the end, meaning we're gonna pay the original back, Plus any interest that we owe the rent on the money on the usage of the money we got at the end of the five year time period. That's one way we could set it up. Most people are more familiar with an installment type off set up where we're going to be paying back periodically as we go. So if we're talking about a mortgage, if we talk about a car payment or something like that, typically we have monthly payments and the bank legs. That and people like that, oftentimes because then it gives us kind of a standard number two. Look at this is what we owe each month and we can see the progress of it and we can see that we can feel comfortable that the payments were happening. So that's a typical way that that alone is going to be set up. So that would be another format we can set up. As we can say, we have a standard payment. We're getting a loan for this amount, and then we're gonna make standard monthly payments, possibly as we go, and those payments will include principal and interest. This is gonna be the confusing piece right here that the fact that the payments that we make monthly if we have some installment type of payment agreement that we're paying back, the fact that the payments include principal and interest is confusing and takes a little bit more understanding. So we'll go through that calculation. It's a little different from a bond, which is almost easier in a lot of different in a lot of ways, because the bond we can separate the two the bond, we say, Hey, this is the principle that were gonna pay back at the end. We can present value that or think about what the value of that will be at the end of the term. And then we think about the interest component that we pay periodically as we go. Just like if we were renting an apartment, we pay the rent as as we live in it, and then at the end of our lease. We give back the apartment here. It just happens to be the same thing. We have money, We got money, we're getting to use the money and we're paying back up something. We're paying back rent on the use of the money as we go, and then we're gonna give back the original money at the end. That would be a bond in terms of on installment note. However, we're giving back some of this original amount and we're gonna be paying some interest with every payment. And the tricky thing is that as this original amount, it goes down, the amount that is allocated to interest will decrease. And that's what we're gonna have Teoh do an amortization table, and we'll have to figure out then how much of each of these payments are gonna be related to interest. How much is gonna be related to principal? Because each payment will have a different portion related to interest in principle. You might ask why we would set it up that way. Why would we do that? Well, our main goal here is to make this payments standardized. So that's what people want to see that the bank wants to see that we can make the payments on a standard amount and people want to have a standard payment so they know exactly what they're gonna pay. The only way to do that is to is to adjust the amount that's gonna be allocated between interest in principle. Because those two will very asked, We go, This will make sense as we do the calculations as we go through amortization tables. 12. 120 Note Payable Journal Entry: in this presentation, we will record the journal entry related to a note payable related to taking out a new loan from the bank. Here is gonna be our terms. We're gonna record that here in our general journal and then we'll post that to our worksheet. The trial balances in order assets, liabilities, equity, income and expenses. We have the debits being non bracketed or positive and the credits being bracketed or negative debits minus the credits equal in zero net income, currently at 700,000. Income, not a loss revenue minus expenses. The difficult thing in terms of a book problem when we record the lone is typically that we have too much information. This is the difficult thing in practice as well. So once we have the terms of the loan and we have the information, we've already taken the loan out, then it's the question of Well, how are we going to record this thing? How we're gonna put it on the books And if we have this information here, if we have a loan for 100,000 the interest is 9% and then the number of payments that we're gonna have we're gonna pay back our 36. Then how do we record this on the books? Well, first we know that we can ask our question. Is cash affected? We're gonna say, Yeah, because we got alone for 100,000. That's why we got the loan. So cash is a debit balance. It's gonna go up with a debit, so we'll increase the cash, and then the other side of it is gonna be something we owe back in the future, and that's gonna be note payable. And that's as easy as it is to record the initial loan. The problem with this the thing is difficult in practice and in the book question is that we're often given, of course, the other information like the interest in the number of payments and possibly more information that can cloudy up the what we're doing and the reason these are needed so that we calculate interest in the future. But they're not really We don't even need that information to record the initial loan. All we need to know is that we got cash and we owe it back in the future. And you might be asking, Well, what about the interest. We owe interest in the future as well, and we do. But we don't know it yet. And that that's the confusing thing. Interest. Although we we will pay interest. And we know exactly how much interest we're going to pay in the future. We don't know it yet. Why don't we owe it yet? Because we're gonna pay back more than 100,000. Why don't Why don't we record something greater than 100,000 you might say, because we know we're gonna pay more than 100,000. And that's because the interest is something that it's like rent. So we're paying rent on the use of this 100,000. And just like if we if we had a building that we rented that we're using for office space, we're not Even though we know we're gonna pay rent in the future, we're not going to record the rents now because we haven't incurred it until we use the building. So the same thing's happening here, we know we're gonna pay interest in the future. We're now we know we're gonna pay more than 100,000 but it hasn't happened yet. We haven't used up. We haven't gotten the use of this 100,000 and therefore haven't incurred the expense of it yet. So the interest That is something we need to negotiate when making the term of the loan. But once the loan has been made and which is trying to record it, it's not gonna be in the initial recording. It will be there when we calculate the payment in the end, the amortization table. So the initial recordings Pretty straightforward. We're just going to say, OK, cash is going to go up by the 100,000 and then the notes payable is gonna go up from zero in the credit direction to 100,000. So what we have here is the cash increasing, the liability increasing. Although we got cash, there's no effect on net income because we haven't incurred any expenses. We're gonna use that cash. Most likely Teoh pay for expensive, possibly, or pay for other assets or payoff liabilities in order to help us to generate revenue in the future. But as of now, we've gotten, we increase in asset and we increased the liability 13. 130 Amortization Schedule: in this presentation, we will take a look at how to put together an amortization Schedules related to notes payable. Here is gonna be our information. We have our initial journal entry. Based on this information, we have a loan that we took out 100,000. We've got the interest at 9% number of monthly payments. 36. To put this on the books, the initial loan. All we need is really the 100,000 to record the initial loan. Meaning we got cash of 100,000. The note payable went up by 100,000. So here's the cash going up. Here's our note payable. The note payable is now on the books. Now, the tricky part is when we make the payments because we're gonna make 36 of them even payments. Some of that will be decreasing, the note payable, and some of those payments will be recorded as interest expense. And it'll differ as time passes and therefore we're gonna have to break those two out now, just before we get into that note that a lot of times the loan will have these terms and the payment amount, but not an amortization schedule. And even if we do have an amortization schedule, it may be easier for us to to set up the system, to have two individuals or break out and adjusting process to this and a process for data input, meaning If we have a bookkeeper doing the data input that wants to make things as easy as possible. And we have a new adjusting department out, possibly an outside c p a firm working Teoh just things then we might just say, Hey, if the easiest thing to do is just make the payments and when you make the payments as the bookkeeper, credit the cash and then always just record it, Teoh the note payable, even though part of it is interest and then at the end of this will just adjust this according Teoh, the amortization schedule. What that does is it allows for the same recording every time we make a payment to just be standardised. So all we have to do is write a check. We don't have to break it out every time between interest and principal, and then the adjusting entry can be made by the Outside CP firm at the end of time period by just looking at the amortization schedule and fixing it from a periodic basis. So from a practical standpoint, that's one way to go the other way we do. This is obviously, if we get this loan amount and they don't give us an amortization schedule, then we need to make an amortization schedule. And we need to properly allocate the interest in principle so that we can record what we have properly. So that's what we'll do now. Now, just a note here. If we're not giving any one of these informations, we can't find the other by by putting this into it, excel very quickly. So just note that if they didn't give you the interest, for example, but they gave you the payment amount, then you can calculate the interest. So if any one of these aren't given its, it's possible for a contract to be written and not experts expressively give one of these items because it's implied by by the other, meaning if we're gonna make so many monthly payments 36 monthly payments for the original amount of 100,000 we can then figure out the interest right? Ah, and if if it's 100,000 loan and they gave us the interest and we had 36 payments, then we can figure out the payment amount. And that's common in a book problem as well. So it's it's useful just to know the formula in excel. We won't do the math here, but if you were in Excel that you can have equals the payment. PMT is the function and then the interest rate, and it will guide you through it here. And then we're going to take that divided by 12 because we want the monthly interest rate. So it's 9% divided by 12 and then the present value comma, that's the next function. So here's the comma for the next function. Ah, the number of payments is gonna be 36 and then comma, and in the present value is going to be the 100,000. So that's just one way we can get to this payment amount. Want to derive this payment amount ourselves because then it will help us to tie it out to the amortization schedule in practice. Of course, if you were to take out a loan, whoever you're negotiating with would probably be negotiating and just giving you this payment. They would just say, Hey, can you afford this? A payment amount. And what you want to be careful of, of course, is to know what the interest is. Ah, because you want to know not just what the payment amount is, but how much your pain, How much more your pain, then the loan amount. So this amount is probably gonna be given if you're negotiating alone, and then we're gonna have to figure out, OK, what's the amortization schedule? How much of this payment is related to interests and how much of it is going to be principal Now, a quick calculation on that, of course, is you can take. They will if I'm paying 3180 times 36. That's 114 4 80 minus the original 100. That's 14 4 80 that we're paying basically an interest over the life of this loan. The life of the loan is 36 payments divided by 12 months or three years. So what? What we want to do now is break that out, however, to a monthly payment because we're gonna be paying a different amount of interest versus principal each month. So each time we make this payment, we got to break it out between interest in principle. To do that, we're gonna We're gonna start to build an amortization table at a building amortization table in Excel. It's it's really easy. If you do it in a paper and pencil, it's easy to do as well. Just make sure you have the right column, so just bring out a piece of paper. I actually put a great on it and you want payments. Interest principal. I usually call it principal reduction and then the principle, because the payment, remember, was given to us. So this is the payment that we were given in the problem here or we calculated it in the prior slide in the rial loan. You probably would have the payment. You wouldn't have the amortization schedule, possibly. And so then we just need to break out that payment between interest and principal. Now it's It's useful to start off with time zero here and put the original principle the original loan amount up top, and then the payment we figured out last time that's gonna be given in our data then we're gonna have to figure out how much of that is interest. So the interest is gonna be always the principal amount 100,000 times the rate 0.99% 0.9 And that would be for a years of The tricky part is we got to take that and divide it by 12 . That will give us for a month. Or, in other words, we can take the 0.9 That would be for a yearly rate divided by 12. That would be our our rate for a month. And that's why we don't represent interest in terms of monthly interest, cause it be very small numbers. But that would be our monthly interest times the 100,000 and that will give us the 7 50 Then we're just gonna take the difference, then it for pain. 3180 minus 7 50 Then that then we're gonna be reducing the principal. The amount that it will be principle is, ah, 2430. And then the new principle will be the 100,000 minus 2430 or 97 5 70 So now we're at our new principal, and then we could just do this again. So the next month payment, it's gonna be the same amount. But in order to standardize that amount, we have to vary the amount allocated to interest in principle. So that means the interest now 7 32 calculated as 97570 R new. Our new principal amount. Here times the interest rate 9% 90.9 So the so the one on then divide that by 12. And there we go, the 7 32 rounded. So again, the other way you can do that is take the rate 320.9 divided by 12 times the 97570 and that gives you the 7 32 And if we just subtract those out, we're going to say the amount that's gonna reduce the principle is gonna be the 3180 minus of 7 32 2448 So the new principal amount now will be 97570 minus 2448 or 95 1 22 So then, if we do this again, we're gonna say period next period. Next month, we're gonna make the same amount 3000 180. The interest that we're gonna pay then is going to be the 951 to 2 times times 0.9 divided by 12. So, 7 13 or we take the 130.9 divided by 12 times 951 to 2. And we get that same amount of if we then allocate the principal reduction, then is gonna be the 3180 minus 7 13 or 2467 So there's our 2467 and the new principal amount is going to be the 9512 to minus 2467 So it's a 92 6 55 So you can see that what's happening here is the amount of interest is going down each time. In the amount of principle, that's the principal reduction amount is going up. In other words, the payments are staying the same, but the interest portion is going down each time, which means the payment being the same is gonna allocate MAWR to the reduction of the principal amount. So the principle is going down the amount of the balance of the loan is going down at a greater rate, which each with each payment we make. Why? Because we only owe interest on what is do. So if we paid part of this interest off, we only we only owe 97 5 70 now. So if we make the same payment, the amount of interest is only being calculated. We're only paying rent on this much money, not on this much money. So the rents, the interest is lower, and the next time we're only paying rent on the purchasing power that we're borrowing on this much money rather than this much money for lower. So the interest portion is lower, so we make the payments the same because that makes it easy for us to think about our payments and standardize our system. But in order to do that, the allocation between interest in principle will differ at the loan goes. Now, if we do this all the way through and we could do this easily with Excel, we can just, ah, copy and paste the whole thing down and use the auto fill function. And then, at the end of 36 payments three years what will happen, of course, that the balance will go down to zero and you could see as we go that the interest is going down significantly. The interest portion that we're paying is going down, and the principal is going up significantly. Now. You can think of that is good or bad, right, because the interest that we pay as a business is actually deductible for us, so that's good. But on the other hand, it's all interest. It's like paying rent were not getting we're not paying about. We're not paying down the liability with the interest portion. And as the principal goes up, that means that we're paying off more of the principal balance. We're getting the loan off the books, so so as we go, it's the same with a mortgage when you when we have the mortgage payment, the first couple of payments we make, it's pretty much all interest is painful because we're not paying down the loan a lot. We're just paying kind of the rent off the loan off and at the end. But the good thing is, of course we may get to deduct it. We get to write it off possibly for taxes but a t end of it. We're paying off. Everything with payoff is bringing down the loan, which is kind of nice because we see the loan balance go down. So there's there's the trade off as we go through the amortization tables. 14. 140 Notes Payable Payments Journal Entry: In this presentation, we will record the journal entry related to making payments on an installment. Note taking the information from an amortization schedule, breaking out the principal portion and interest portion of the payments. Here's we're gonna have our information. We've got our amortization table. Just a piece of the amortization table up top. We're gonna record our journal entry in the General Journal posted to our worksheet our trial balance in balance, where we have the assets liabilities equity than revenue and expenses. Debits being represented with non bracket or positive credits being represented with brackets or negative. Therefore, the debits minds. The credits equal this zero and net income is 700,000 which is revenue or sales minus the expenses. There are none at this time, so our goal here is to record our journal entries now. So the loan we took out on the books is at the books for 100,000. That's the same amount on our amortization table where we start where it's going to go through this amortization table and make these payments. We set up the payment to be even 3180 each time period. However, the amount that's gonna be reducing the principal and the amount that's gonna be allocated to interest varies with each payment. Therefore, we can't just make it a nice easy write a check and have the other side go somewhere to be completely correct, because we're gonna have to decrease cash and allocate that on the other side to the principal portion to reducing the notes payable and then the interest portion to be recording the expense. Kind of like the rent on the money now again, if you're working and where the bookkeeper and someone else to do the adjusting process, or if you just want to make the adjusting process easy in the data input as easy as possible. In other words, if you would you like to just write a check and then not have toe change the other component of it. So you just write a check. The system memorizes what you're doing, so you only have one of their account. It's all the same. You could just write a check and record it to the notes payable, even though you'll be recording too much to the to the principal and not recording the interest at all, and then plan on adjusting it at the end of the time period at the end of the time period. Then you adjust according to the amortization table, and you can do that from within outside C p a. Firm or as a bookkeeper. That's one way that you could make the data input very easy and then make the adjustment in the adjusting process. So that's one option. Otherwise, we need the amortization table, which is something you may not have in most loans. And if we don't get alone, they only give us the terms of the loans, but not to this table. Not breaking out how each payment is as allocated between interest in principle. Then we can make one. We can derive it in excel, which we've seen in a prior presentation. Now that we have it here, we're just gonna make these payments. And after each payment, then the loan balance that we see on our books will then match the new balance after the first payment. So after we're done, this 100,000 should be the 97 5 70 So our first question is cash affected that that yes, it's affected and we know what the payment is. That's the easy part. It's all the same. So we know cash is going to go down with a credit. Then we are gonna have an interest expense. That's what we're gonna be paying. Part of what we're paying off is an expense, and the other part is decreasing the loan. Now the question is, how much is the interest expense? Well, we need the table to do that, and that's going to give us the 750 now. How did it get to the 750? Well, it's going to be the 100,000 here times the rate, which I think was 9%. So it's the 100,000 times 0.9 that would be for a year. It's only monthly, so we'll divide by 12 and that's gonna give us that at 7 50 And then the difference between the payment and the interest is what's going to go toothy principle. So that's gonna be the principal amount here, so we're gonna have to break it out between interest and principal. So if we post this, then we're going to say that the interest started at zero. It's going to go up by 7 52 7 50 That's kind of like the rent on the money. So that's over and above what? We're gonna be pain over and above the initial principal because it's for the use of the money. And then we've got the note payable. We're paying off the 100,000. This is the amount that's actually decrease in the liability to 97 5 70 which should match our amortization table. And we, of course, are paying cash, decreasing cash. So if we see this all laid out, then of course we're making the payment, then were allocated at between principal and interest. Here's the principal component decreasing the loan to what it should be on our amortization table after the first payment, and then we're gonna have the other side going to interest. And this is just an expensive doing business. We had to finance the business, and we're just paying this just like we would pay rent on an apartment or something like that or ah, building in order to do business next payment we're gonna do, and we're just gonna jump forward to the next month and make the next payment, and much of it will be the same. So we have our previous balance here. The note payable 97 5 70 97 5 17 We're gonna make the same amount of payment. Cash is going to be the same. That's the point of standardizing this. However, the amount allocated to interest in principle will differ, so we can't just memorize even if we'd have to. Two accounts. We can't just memorize the last transaction because the allocation between interest and principal will differ. So we have to go the amortization table and say OK, the interest expense portion now is 7 32 which how are we calculating that? Well, it's the 97 570 times the rate, which was 9% 90.9 divided by 12. Because that's a yearly amount. We want a monthly amount, and that's gonna be the 7 31 about 7 32 So that's gonna be our interest portion, and the rest will be principle. That 1 3080 minus 27 32 gives us the principal portion. If we post this out, then we're going to say interest expense goes up again. So it's going up in the debit direction. We're going to say that the loan is going down by the principal components to 95 1 22 matching what's on our table, and then the cash is going to go down. So if we have our amortization table, it should be pretty straightforward. We can match these all out on we can. We can always tout our loan to the amortization table. Now just note if you have. If you have multiple notes payable, some people group them all into one account on the trial balance. And if you do that, then you need a subsidiary account. Of course, to be able to match out each amount, Teoh it it's amortization table and be able to back up the one account on the trial balance . You may have multiple loans and actually list out each loan on the trial balance, and that's useful sometimes because then you can see each loan amount and each loan amount , which should easily tie out to the amortization table. So it's a couple different options. We'll talk about more options after we go. We also have an issue of short term versus long term that will have to deal with when we break these out into the financial statements 15. 150 Notes Payable Adjusting Entry: In this presentation, we will take a look at adjusting entries related to notes payable. Now remember what adjusting entries are as compared to just normal day to day type journal entries, the adjusting entries or something that happened at the end of the time period. And we're gonna make some type of planned adjustment at the end of time period either the month or year, in order to make the financial statements correct on an accrual basis. The adjusting entries typically include at balance sheet accounts, something above the blue line. In our case, above retained earnings typically do not include cash and also include an income statement , accounts, a one balance sheet account, one income statement accounts and that you're gonna be usually the rules now the adjusting process. Also note that normal adjusting entries are part of the plan, meaning they're not correction of errors s. So that's what we're going to set up here. We're gonna think about how can we set up the loan payments to plan for in adjusting entry process to make that two components as easy as possible in order to make the data input for the accounting department as easy as possible. And in order to just make a quick adjustment at the end of the time period, that would be as easy as possible. Now, this could also be a result of an error, something that had happened on accident that we then fix at the end of the month or year just to put things correctly in place so that we could make the financial statements. But from this perspective, first, I would like to look at it. It's just something that we're gonna plan for. So we know that if we have a loan here, if we have alone the terms of the loan here are gonna be a $100,000 loan interest rate to 9%. Number of payments. 36 the payment amount 3180. If we want to make something as easy as possible on the accounting department, then we want this data entry to just be data input to just write the check to just be over right. What is owed and let the system record the transaction to do that. The easiest way is to set the system up when you write the check for 3180 each pay period because the check amount will be the same. The other side. We can have two system just go to notes payable. So every time we write a check, then it would debit notes payable, reducing the liability and credit cash. That's not exactly proper, because obviously, part of this 1 3080 is interest, not reduction of principle. And we're not allocating then at the point of payment, the amount going to interest versus of principle in accordance with the amortization table , instead just taking it all out of the note and therefore this note. Then we see it is, of course, wrong. But of course we're planning for it to be wrong in this case, why there's a couple different reasons. One is that it's possible that the data input doesn't even have the amortization table. They only have the loan, and the loan didn't given amortization table, and they didn't We didn't know how to derive it, possibly, or it's possible that even if we derive the amortization table, it's These amounts allocated between interest and principal would differ each time, and we'd rather set the system up as easily as possible just to basically say every time you write a check, just write the check, and the system will do what it needs to do, just posting it to the note payable. And then we'll make the adjustment periodically at the end of the system at the end of the at the end of the month or the end of the year so that the financial statements are correct at the point in time we make the financial statements. So in other words, these payments should have cash going out of 1 3080 and in the note payable for this 1st 1 being 4 2030 then interest being 7 50 the 2nd 1 should be cash going out of 1 3080 then the debit being interest 7 32 on the debit to 4 2048 for the note payable. But this is, of course, a lot simpler for the system Teoh to do. Then at the end of the time period, what we're gonna do is just say OK, now we have the amortization schedule. Three payments have been made. This is the point in time that we are at all we're gonna do before making the financial statement as of the adjusting entries is to make this number, uh, match this number here and record the interest, which will be the difference. Which, of course, should be the interest amount. So in other words, we need to make the loan payment go down to match what the amortization table is at this point in time after three payments. So we're just gonna take the 92 6 55 minus the 90 for 60. And that's gonna be a difference of 1 2095 That should also equal the interest that didn't get recorded, which is the 7 50 plus two seven 32 plus the 7 13 the 1 2095 So what we're gonna do is record that now we can think of this two ways you could save of note payable has a credit. We need to make it go up to this 92 6 55 So we're gonna do the same thing to it. A credit. The other side is gonna be the interest, expense and expenses all have debits, and it's gonna go up in the deputy direction. So in other words, we're gonna debit, interest, expense and credit the notes payable and what that will do when we post this. Then the interest expense will go up to the amount that should be here for these three payments that were made that we didn't break out the interest for and then the note payable Will go will go up from 4 90,060 by the 1 2095 to the 92 6 55 there now matching what's on the amortization table. So there we have our our Justin entry. So periodically we can we can make our amortization table work, match what is on the trial balance and record the interest expense, Uh, at that point in time, on either ah, monthly basis or a yearly basis at the end, and separate those two functions between the data input and the adjusting process. Now, we could also see this another way, Whereas this would probably more be like an error because the same thing could have happened like an error. It could be that, uh, the data input didn't have this amortization schedule so they could do one of two things. They probably wrote the check. And this is something we would just look for when we do our Justin entries looking for errors, we would say, Oh, well, the amorous this and the note payable doesn't match the amortization table that we would have to derive, possibly because we would get the note. And then we may not have an amortization table. We wouldn't make it. And then we would say, OK, this is where we are at. After three payments, we think there should be three payments and we don't see that here, right? We don't see our note payable doesn't match up to this amount. Well, there's two things that could happen. We obviously know they wrote the check so we would be able to find the checks that they wrote. But the other side either goes all to notes payable, possibly, or it all goes to interest expense, meaning the three entries they wrote this time was the cash is the same. They wrote the cash going down, but the other side they'd wrote all to interest expense, as if they weren't paying down any principle. It was only going to interest expense. So this is the, you know, the same kind of adjusting entry we could have. Now, if you're going to set up the system on purpose for them to do something easy, this would be easy to do as well. But it's probably better to put the amount to the notes payable and then adjust it, because then you don't have to worry about the interest expense being a temporary account and rolling out to the capital account rolling out to retained earnings. So if we were to set up the system on purpose for them for that, for the Canon department to just do the easiest thing possible, which would this would be an easy journal entry. But it would be it would be better to put it, probably Teoh, to the note payable rather than interest expense because knows table is a permanent account and it might be easier to see the activity. We also might have other things going to interest expense for other notes or other type of of interest that could muddy things up, whereas the note payable. If we only have one account for the one lone, I would be a lot easier to see what's going on when we look at the G l when we look at the detail. But if this is what happened, then of course, we just need to adjust this as well. Then we're just gonna take our same amortization table. We're going to say, Well, it should be 92 6 55 on this note. So we're just gonna say, OK, well, there's the note 100,000 minus 29 to 6 55 7003. 45 is the difference that we're gonna have. And that's of course, the principal reduction we didn't record, which is the 2430 plus the 2448 plus the 2467 So that's what we need to record then. So we're gonna say, Are the notes payable is gonna be debited to bring it down. So the 100,000 minus that amount and then the interests have to be credited, which is kind of weird, but it needs to go down. The interest is way too high because we allocated both interest in principle to it. It needs to go down to that, and that will bring the balance down to we hope Once this is recorded, the some of these three, the interest should be three payments 7 50 plus the 7 32 you plus toe 7 13 1 2095 So if we do that, then we're going to say the note payable is going to be debited, bringing it down to 92 6 55 That's what we want. Now that's our balance. And then the interest is gonna go from 5 9040 down by the 3 7045 to 1 2095 which makes sense, because that's gonna be the some of the interest for the three periods paid. 16. 170 Notes Payable Current vs: In this presentation, we will take a look at the reporting of notes payable on the balance sheet, focusing in on breaking out the current portion versus the long term portion of notes payable. In theory, this is an easy thing to do to break out the current and long term portion. But logistically, there's a few different ways we can do this in a few different reasons. Why we would want to do it different ways. So we'll take a look at a couple different options for us to actually set up the system to be breaking out the current portion versus the long term portion of the notes payable. First, we need to know just what we're talking about. In terms of current versus long term portion, here is gonna be our balance sheet. It's just gonna be a quick balance sheet that we have generated from this trial. Balance of his trial balances in order as its liability equity, income and expenses, and we know it's in balance because the debits equal the credits that's with this green zero represents, and if we convert this to a balance sheet, then of course it should be in balance in terms of the accounting equation, the total assets being one million to 54. 84 then the liabilities and equity, of course, matching that assets equal liabilities plus equity, then our equity is a little bit tricky. Note that that's gonna be all of these together. So this plus this minus that, that's our equity. So we can see this is inbounds is just a quick little balancing items so that we can see that we are in balance. We're focusing here on the liabilities. So we've got an accounts payable and we've got the loan payable. Our question is, is it short term or long term? The account payable is typically short term. Why? Because it's gonna be a current liability, which is just going to be something that has an arbitrary numbers do within a year. That's what it means to be current, so the accounts payable usually do. But I'm 30 or 60 days, so it's almost always current. The lone, however, is a little bit tricky because we have this installment loan that we're making payments on . That means we're gonna make 12 payments that are a current. If the loan is more than a year, then we have a long term portion. So this loan payable gets messy because now we have to break that out. We've got under the current portion. We're gonna have some component. It's gonna happen to be 31 82 in this case, and then the long term portion is gonna happen to be 61 5 73 So the question is, how do we break this out and how we were going to represent that on the trial balance. Now, if we only have one lone, then we can put it on the tribe ounces, just a loan payable, and we could support it, back it up with the amortization table. So in this amortization table, for example, here's the number of payments we have. Ah, and we're only showing part of it. But we goto 15 payments were making payments of 1 3080 then this is the interest in principle portion of it. And here's the principle balance. After any given payment time, we're going to say that the end of the year in this case, that date we're making a financial statements is after three payments, so we should be here on the amortization table, which we are. So there's where there's where we are. So now what we want to do is break this number out because we can't just pull this number end of the financial statements because we need to break it out between a short term and long term portion. So to do that, we can say, OK, well, how much of this is gonna be due within the next year? The thing that we will typically Dio when we first started thinking about this is Well, we'd say, Well, we're making payments of 3000 180. We're gonna make 12 of them times 12. So this is how much we're gonna pay. Wouldn't that be the current portion? And the answer is no. And the reason for that is because this includes interest and the interest has not yet been incurred. We haven't. It's like it's like paying the rent. That would be like saying that we owe the rent on on building were renting before we used it. We don't owe the rent yet because we haven't used it. So although we're gonna pay that amount were not recording it as a liability yet because we haven't yet incurred the interest portion. So we just need to have the principal portion. And of course, that's a little bit more tricky because it changes. So we can see the principal portion if I added these up this plus this. Plus this. Plus this. It's going to defer hostess participles, explosives, participle supposed to explosives 12 times and noticed that the amounts are deferred different. So we have to add those up or we can say OK, well, this is where we stand as of the third payment. That's how much is still do as of the third payment and this is how much is going to still be do 12 months later. This how much is still do so In other words, this is gonna be our long term portion cause 12 months later, if we go 12 months out, we're gonna be here. Then we're gonna go 61 5 73 That's how much of the principal we still owe after 12 months and the difference between those two, then if if this is what we owe After 12 months 615 70 minus what we owed now 92 6 55 That's gonna be the current portion, so that's how we can break it out. So if we have this format and we want to make the financial statements, we've got to take this number from the trial balance and break it out between the current and long term portion. Now, this is easy to do if you only got one lone and if you're doing this outside of the system , may meaning, I'm making the financial statements outside of the system like an Excel or something like that. But we may want, for example, to have the system be able to generate this report. In the system. We use something like QuickBooks or some type of accounting software. Then I don't wanna have toe break it out separately. I'd like it. I'd like the system possibly to make this adjustment between short term and long term, so we could try to set this up different ways so that we can make this breakout happen in different ways. For example, if we made the same type of argument, here's our balance sheet. Here's the short term and long term. Here's our original amount that the 92 6 55 We might say, Hey, I want to put it in the system so the system can take these numbers directly and make a balance sheet from it. I want the system to be able to break out short term and long term. I don't want toe do it outside and like Excel. I want the system to be able to generate a balance sheet with a short term and long term. Well, we could just do a journal entry. Then we could take these numbers and we make that same journalist we were going to say, Well, it's all in short term right now. What we need to do is break out the long term portion, which we know is this from our amortization table. So we're gonna take this much out of short term and put it in the long term. So here's our journal entry Short term is gonna be debited to go to 31 82 which which is going to be. We could calculate that by summing up all of these, not including this one, but all of these down to here, down to the yellow one, or we can subtract out this number where we stand now minus this number, and that would give us the short term and in the long term is right here on our table. And of course, if we added those two up, then if we added thes 31 0 82 plus that 61 5 73 we get our balance of the 92 6 55 Okay, so in this format, this is nice, because then the balance sheet might be it will be generated directly from the data that's in the system. The problem with this, however, is that now, Now you have these two accounts might not be right next to each other, cause most systems will wind it up by current liabilities. And if there's a bunch of other current liabilities that will be in between this one, so they're not gonna be right next to each other, and so it'll be more difficult for us to tie out directly to the table. Also, when we make payments, it's very tedious. If we were going to try to break out the current and long term portion, each payment that would be that's probably not worth our time. to do so. If we make a system like this, we might wanna just break it out at the end of the month and then adjusted backed back together again. It's on a reversing entry at the beginning of next month so that we're back to one account that we can tie out to the amortization table as we go. So that's, you know, one method that we can use with that. Now what if we had, like, two loans? If we have to loans, then things get a little bit messier again. So there's a couple different ways we can We can account for two loans if we had if we had loan one here 100,000 at 9% and loan to 40,000 at 8% and the related amortization schedules below them, then how can we deal with this type of situation? Well, we might have a try abounds with just one account, we might decide. Hey, I'm just gonna have one account on the trial balance, and that's gonna represent all of our loans. So if we do that, then we need to support this account with a related schedule that will sum up the amortization schedules, meaning we're gonna have to have ah related schedule. And the related schedule will, of course, say this is where we're at now for 92 6 55 plus 36 1 20 close to 36 112 And that's the 1 28 7 67 So the nice thing about this is that this number is very simple, like one number on here, and we can keep just one number and then supported, so we don't have a lot of detail over here. When we typically generate just normal reports, it'll show one number so that people looking at it won't see a bunch of different loans on it, which they don't care about that just want to know the one number. But if we want to break that out, then between the short term and long term like this on the balance sheet, then we're gonna have to do another work sheet. And we're going to do it outside the system again. Typically, to do that, so we'll have to say, OK, well, here's here's the first loan. This is gonna be the short term portion for the first loan and we'll do the same kind of break out. The short term portion is here, and that would be this minus this. And then here's the short term portion for the second loan, which would be this minus. This is seven, and that will give us the short term portion that we would then use to put on the financial statement we would use to break out this 1 28 7 67 to short term and long term and then the long term portion for the first loan and note. Oftentimes, if you if you break out the loan, you might want to use the last four digits of an account number, possibly one way to separate the loan. Because the last four digits are usually distinct digits. It's just one way to do that. But we're going to say this is going to be the loans long term for the 2nd 1 So that's gonna be the 61 then the long term for the 2nd 1 first and second loan, and I dont give us total long term. Then, if we add these up, the short term and long term will give us the 1 28 7 67 And these two, then would be the amounts in this case that we would have to break out on the financial statements. Now, we could do this a couple different ways. Still again. If we had to loans, you might be saying, Well, if we had to loans, maybe we want to break out again the short term and long term portion on the financial statement on the trial balance because then it allowed the system to to make the financial statements again. So in this case, we're gonna make two accounts on the trial balance, but they're not gonna represent the two loans here. They're going to represent the short term and long term portion. So we still have our same worksheet We have are two loans here. We've got our same worksheets that we're gonna have and the same items breaking out, short term and long term. But now, once we break this out, we can make this adjusting entry on our trial balance so that then we end up with something on the trial balance that can be used to generate the financial statements directly, possibly directly from the system. Without us having to export it to excel or something like that. We can have the tribe bounce tied directly to the system. So in this case, we would say, OK, it's all in one account again. We want to break out the long term portion, which is this. So we're gonna debit the short term portion and credit the long term portion breaking the 1 28 7 67 out to the 31 1 82 and the 90,005 85 and then thes two numbers, then could be used just from the system to generate the financial statements. Break it out between the short term and long term on the liability section. That's another option we can have. Eso This would be the journal entry that we're looking at here. We're going to say that we're gonna break out the short term and long term portion, lowering the amount in the short term to the 31 1 82 and in the long term, 5 90,085 these two amounts, then being used again. This is one we might want to reverse at the at the first day that next time you're putting it all back into one account because that will be easier for us to track just as we go as we make payments and then making a Justin entry at the end of each time period. So that's another option. We can have now, another option we can have and this is useful for us to have on the trial balance. It's really useful for us to make payments, meaning what if we want on the trial bounce? I can put a different loan for each loan, meaning I'm gonna have the loan payable and the number, the lone table and the number. And what this does is it makes it really easy for us to then go to the to the trial balance and see exactly which loan we're dealing with, meaning when we make payments on this alone, we can tie out this balance to what's on our trial balance, which is nice. So then every time we make the payment, we can track it to the specific loan amount and then when we make this payment, of course we could track this out to the specific alone, So that's really good for the for the data input person if we're If we're importing the data during the time period and we want to make sure that our amortization table ties out to there are large loan amounts specifically, then this is a nice system tohave. Of course, it doesn't break out the short term and long term again, and that's gonna be the problem. So when we put on the financial statements, we just want basically the short term and long term not broken out by two different loans. Meaning we want the total to 6 55 plus 2 36 +112 this 1 28 7 67 broken out between short term and long term. So in this case, then we're gonna have to do our work sheet again. Same worksheet taking this information from the two loans, breaking it out not by loan, but by the short term and long term portions. Same type of idea to break that out. And then we'll have to make the financial statements based on these numbers, which will add up to the 1 28 7 67 which is the some of these two. So so again, we have to do some work outside of the system really to make the financial statements proper if we use this. But it's nice to track these two as we go if we make payments. And then finally, we have one other option, which is the kind of a most detailed option or another option that brought more than this. But we could have a short term and long term portion for each loan. So in this case now we're going to say, Here's the first low in the second loan and we've got the short term long term portion for each loan. And what this could do for us is possibly allow us toe, have all this detail and maybe set up the system to when we make the financial statements, combine the accounts together. We can tell this system hate. Combine these two accounts for the short term and combine these two accounts for the long term, possibly and then So this possibly will give us the detail within the trial balance and make able for the system to create the financial statements without us having to go outside the system. So in order to do this, it would be nice, because these two accounts again with Ty out directly here. So here's our Every time we make a payment, we can tie out to the balance. So that's nice. And then what we probably want to do is make the adjustment between short term and long term on a periodic basis again. So at the end of the month, we can then say, OK, we're gonna break this 92 6 55 into short term and long term. That's in this loan by by taking the long term portion 91 5 73 and making the journal entry . So we'll break this 92 6 55 down to the current portion 31 80 to 31 82. Long term portion 60 once, 5 73 61 5 73 And we'll do the same for the second loan. So we're gonna break this out the long term and short term portion, making the short term go down to what the short term should be and in the long term, matching the long term amount here. So this would be kind of a journal entry were taken from the system, and we're making it in one account and break it out to the long term and short term portion again. If we did this way, we would probably want to reverse it again and put him back into one account, meaning this is where we start. This is where we end at the end of the month or year, and then we put it back to this away at the at the next stage or the first day. The next time we would reverse it. Why? Because it's easier to track. We can't really track short term and long term as we make payments very easily. Beaver T is to do that, so it's a lot easier to track it and match it to the amortization schedule in one account, and that if we want to break it out in the two accounts, that would be useful, because then we can tell our system possibly to take the two short terms and put them together as the current portion and take the to long terms and put them together at the long term portion and possibly be able to make this happen all within the system, without having to do any kind of thing outside the system to create the balance sheet 17. 235 Discount Amortization Effective Method: in this presentation, we will create an amortization schedule for a bond discount. Our information will be up here. We're gonna have the face amount of the bond 100,000. The stated rates rate on the bond 8%. The market rate, 10%. We see the market rate is greater than the stated rate. And therefore we issued it at a discount price lower than the face amount. In this case, 96 4 50 form. We're gonna have semi annual payments and it's a two year bond and therefore there's four time periods. There's two years and every two times a year and therefore four time periods. We want to see this in context by looking at a trial balance and see it within something that balances in context. So we were to record this on a trial balance. It would be a liability represented with credits. Here we put it on the books for 100,000 but then we had to put on this discount. Why? Because we only got paid 96 4 54 So that means that we debated cash for 96 4 54 We credited the bond payable for the 100,000. And then we had to put on this discount because the difference between the 100 and the 5 3046 will be the 96 4 54 That's gonna be the carrying amount. As the bond goes goes through as we go through the process of the bond, we typically make bond payments, which will be at 8% the stated rate of the face amount of the bond divided by two. Because it's every 66 months rather than, ah, full year. Uh, and so we typically do not. We're not going to in this case, pay off the principal of the bond. We're only gonna be paying interest. We're only gonna be paying, like the rent on the use of the money. We're not paying back the principal. However, we do have this discount here that we got to deal with. We've got to get rid of that. Somehow. It needs to go away by the end of the bond. So how are we gonna do that? How are we going to reduce this? Well, one way we can do it is the straight line method. That's not the preferred method will talk here about the effective method, but it would make sense just to start there. So if we took the 5 3046 and we just said Okay, I'm just gonna divide that by the number of periods which in this case is 42 years. Times two would be the four because it's semi monthly and therefore will just reduce that every time we make a normal interest payment and we'll reduce it to where we're gonna reduce this and put it to bond interest. Why does that make sense? Because this thing Onley came about because of the difference between the rates. That's what we That's what the That's why it's there. So we're gonna write it off throughout the bond in accordance with writing it off to the interest expense as we go now. Straight line method would just have an even amount written off, and that would be that would be fine, but it's not exact. It's not. It's perfect as using, um, effective method which would take the carrying amount and apply out the proper the interest based on the carrying amount. So if we take a look at the straight line method as a comparison. And then we'll go the to the effective method just to get an idea of this. Remember that we have a little table here. We're going to say that we have the united we have the on advertised discount is that 5 3046 which is the 100,000 minus 2 96 4 54 giving us the carrying amount of 96 4 54 And that's gonna be this minus that. That's what we start off with on the table. And then we're just gonna take this 5 3046 and divide it by four periods, giving us, in this case 8 87 So if we just had 87 that we're gonna reduce the Unadvertised amount each time. By then, we would say, OK, the 5 3050 fours, where we started minus 8 87 we would take it down to 2660. Then the carrying amount would be the 100,000 minus the discount. Bring us that 97 3 41 and then the next time period, we would say same thing 8 87 is going to be reducing the Unadvertised discounts of the 6 2060 minus 87 brings us to 7 1073 of the carrying amount then would be the 100,000 minus the 7 1073 or 98 to 27. Same thing for the fourth period, bringing the balance from 7 1073 down by 8 87 to 87 bringing the carrying amount to 100,000 minus 87 or 99 1 14 And finally, one more time we do the same thing, bringing the 8 87 down by 87 to 0, and then they carried him out, 100,000 minus zero, leaving us with 100,000. So the point is, at the end of this time period at the end of four periods, in this case two years, we want to be left with just the bond payable. And this needs to go away because at the end of it, we're just gonna pay off the bond. So this would be like the fast or easiest way to think. Through this, we're gonna use theme or proper method that the effective method and the reason it's more properties because it's going to allocate kind of like a note payable. That's an installment note. It's going to allocate based on the carrying amount and therefore be more accurate in terms of the interest allocation. So let's go through this method. We're going to say that we're starting off in the same place where we've got the carrying amount, and the carrying amount will always be calculated as the 100,000 minus the Unadvertised discount. The Unadvertised discount is starting off at the face amount, minus the issue price. So the face amount minus the issue prices this 5 3046 and the carrying amount is gonna be the 100,000 minus 25 3046 or 96 5 45 R 96 4 54 So under the first period, we're gonna say the cash paid is 4000. Now that's straightforward. It's just on the contract. So the contract says that the bond is 100,000 than the stated rate. That rate on the contract is 8% or 80.8 That would be for a year, but it's only six months So we have to take that and divide it by two. Other way we can calculate that is to take the yearly rate point of weight divided by two. That gives us a monthly rate times the 100,000 and that will be the 4000. So there's that and then the bond interest we're gonna have then it's gonna be calculated as the carrying them out. So we're gonna take this amount 96 4 54 times the market rate, not the stated rate 0.1 that would be for a year. Then we'll divide it by two because it's only six months and there's the 8 4022 war war rounding here Clearly. So then we can also calculate that as 0.1 the market rate divided by two for six months and in times the carrying value 6 96 4 54 So there we have that. If we take the difference between those two, the 8 4023 minus of 4000 is a 23. And then, of course, the Unadvertised portion 3546 is gonna go down by the 8 23 and that will give us the 2000 to 7 2023 will give us this amount, and then the new carrying amount is always gonna be the 100,000 face amount. And then we'll always subtract out the Unadvertised to 73. So I'll go through the math at least one more time just because it's easier toe pick these up when we see it. So we're going to save the second period, the same amount for the cash. It's always going to be the same, but it's useful to know where we're picking these up because it would get these two rates mixed up. It's common to get those mixed up, so 100,000 face him out, not the carrying amount, the amount on the bonds with contract times 0.8 divided by two. So face mount times a contract rate. And then we're going to say that the carrying the bond interest, however, is gonna be the carrying amount 97 to 77. This kind of like what's actually happened according to the market, we think, and that's gonna be this times the market rate 0.1, divided by two for a 63 and that if we subtract us to out 8 4064 minus 8 4064 and then we'll have the Unadvertised discount, which is gonna be the to 7 to 3 minus 28 64 1859 And then, of course, are carrying amount is always gonna be the 100,000 face amount minus the 1859 or Unadvertised discount. 98141 Let's do this one more time again. The cash. Once again, it's kind of be the 100,000 face amount Times 10.8 divided by 2 4000 Then the bond interest is going to be 98 1 41 times the market rate divided by two for 907 The difference between those 2907 Then we're gonna take this number minus and 907 giving us the 9 52 And then this will always be the 100 minus the Unadvertised discount for 99 48. One more time, we're going to say 4000 for the cash. Same calculation, bond interest. It's gonna be this number times the 10% market rate divided by two. Then we'll see. Then we'll subtract these two out, and we get to zero here because we're taking the Unadvertised discount minus the 9 52 That's what we want. Of course, the Unadvertised amount to get to zero and then we're left with just this 100,000. That's the bond face amount that will then pay off at the end of the bond. So let's see what this looks like in context. How are we gonna actually use this to make journal entries? So here's our trial balance. Here's our worksheet. We're gonna make this first payment. So what we're doing here remembers, we're making an actual payment, and then we're also kind of we're doing kind of two things. We're doing an actual payment, and then we're trying to get rid of this discount like, periodically as we go. So we're going to say that the payment is just going to be the cash that we're gonna pay. Cash is going down caches debit balance. We're gonna credit it. It's on our table. It's also just on the bond. The bond is 100,000 times the stated rate on the bond divided by two And then we're gonna have the bond interest expense, which is given on our table now. So expenses always go up. We're gonna debit the interest expense, and then the difference is gonna be the discount. Also on our table. The 4000 plus two eight 23 is gonna match the bond interest expense here. So the deputy equal the credits. In other words, So if we post this, then we're going to say the bond interest I's gonna go up and that will bring it in, come down the cash. The cash is here bringing cash down because we're paying the interest of 4000. But we're paying. We're paying 4000 but we're applying 8 4023 to interest. Why? Because we're also applying port of the discount here. We're reducing the discount and applying that to the interest. Why does that make sense? Because the the difference here this bond discount came from the difference between the market rating and the stated rate on the bond. So that's what we have here. The bond interest that goes up, the cash goes down. The bond interest is going up by mawr than the cash we paid because we're allocating this discount to bond interest as we go through paying off the bond. If we go to the second payment will do the same thing with the second payment now. So we're jumping six months into the future now, and doing the same thing I know are not know much active. No activity has really happened other than our payment last six months ago. But that's okay. We're gonna do this again. We're gonna say cash goes down so cash is going to be decreased. Of course, that comes from the table. It's also stated we're going to say that the bond interest is gonna come from our table and then the difference will be the discount on the bond. It's the discount on the bond. So if we record this note that the the accounts are the same, but the amounts are going to defer, and that's that's what's gonna happen using the effective method as opposed to a straight line method. So then we're just going to say the bond interest is going to go up the debit direction, bringing, bringing expenses up, net income down. We have the cash going down and then we have the bond interest. Ah, discount on the bond is going to be decreased. So this discount of decreasing. So if we compare our totals to our table, then we could say that before we did the 2nd 1 that the discount here matched the discount after the first payment. And then, of course, the carrying amount is going to be the 100 1000 minus 2 to 7 to three. That's gonna be that 97 to 77. Now, we did our second payment, and here we're. Here's where our discount is that matches our table after the second payment. And then, of course, the carrying amount is now gonna be the 100,000 minus the 1859 or the 98 1 41 So our table here should, you know, ty out to our our accounts as we posted this information 18. 240 Premium Amortization Effective Method: In this presentation, we will put together an amortization schedule related to a bond premium using the effective method. This is gonna be our information on the left. We're gonna have the face amount of the bond 100,000 stated rate, 12%. That's what's actually on the bond. The market rate is 10%. Therefore, the stated rate is greater than the market rate. And that means that we're gonna have a premium. We issued the bond at 5 103,046 The difference here. One of 35 46 minus the 100 or 5 3046 being the premium, it's gonna be a two year bond and we pay semi annual. Therefore, four periods of two years is what we will have. So if we look at that in context, we always want to look at the trial balance and get some idea of what's actually happening in terms of recording this information. When we put it on the books, we put it on the books is a liability for bonds payable 100,000 and we put the premium on the books here of 5 3046 and we received cash of 103,546. The carrying amount. Then at this point in time, when we just put the bond in the books is the adding these two together, the two credits one of 35 46 Now, the issue here, of course, is that we make payments on this bond. We don't pay back that principle. So this amount here, the 100,000 doesn't go away, unlike a loan or an installment loan where we make partially interest in principle payments . So what we're going to do is let's just leave that on. The books were gonna pay interest at the stated rate at 12%. But then we have this question. What do we do with this? 5 3046? That that payables gotta go away? The premiums going to go away somehow by the end of this is because once the bond is paid off, it needs to go away. Well, how are we going to do that? Why is it there in the first place? It's there in the first place because we issued the bond for more than the face amount Why did we do that? Because there's a difference between the interest rates and therefore what would be a logical reason for us or way for us to get rid of this premium over the life of the bond? Well, we could expense it and interest expense as we go, because that's really what it is. It's interest expense. Now the easiest way to do that is a straight line method. We're gonna We're gonna go to the effective method. But just to show you just the easiest way to do this. Ah, and knows the effective method is the preferred method under general accepted accounting principles. Typically, it's it's more precise, but the straight line method is easy to see. So let's take a look at that. If we took the 5 3046 and we just divided by the number of periods four because it's two years and we pay semi semi annually, then we can just get 887. So that's gonna be the 5 3046 Divided by four gives us 8 87 and then if we were to just reduce this amount by 87 reduce the premium by 8 87 each time period. Meaning this number now is gonna be this number minus this number. And then the new carrying amount is gonna be the 100,000 minus the Unadvertised premium or the 97 3 41 And then, if we were to do that again, would say, Now, we're gonna take the prior number of minus this number to get the 7 1073 they carried him out would be the 100,000 minus two set 7 1073 for the new carrying amount. We did it again. This number minus this number gives us this number and then the carrying amount being the 100,000 minus 2 87 And finally, one more time we do the same 87 87 minus 87 0 The carrying amount, then, is the 100,000 minus zero or 100,000. And then at the end of the term, then that would be one way that we can expense the's. What we would do is do a journal entry and expense thes each time. Uh, and we would be left with at the end of the day. This would then go away at each time period. It would slowly be expensed evenly to interest expense, and we would be left with just the bond payable. Then we would just pay it at the end of the term, as we would just like any kind of note payable. Uh, we would credit cash and debit the bond payable. Now, the problem with that is that the expense isn't really in accordance with the matching principle. Exactly, because we should do some kind of effective method. We should be changing the amount that's gonna be allocated between two to interest based on what the carrying amount of the bond is. So to do that, we should do the effective method. This is the preferred method, a bit more complicated method. The difference between the two methods might not be material that might not be significant for decision making, and therefore this straight line might be easier to use them. But this would be the preferred method. So we have the Unadvertised premium here. So this is what we're going to start with in period one. We're going to say that the Unadvertised premium is the 1035 46. What we issued it for minus the 100,000. That's the Unadvertised premium. And then the carrying amount is always gonna be the 100,000 plus the Unadvertised premium of the 3546 to get the one of 35 46. Now, if we go through this, then we're gonna say, Period one, we're gonna get the cash paid. Now the cash paid is straightforward. It's what's on. That's what we promised. That's what's on the note. So that's gonna be the 100,000 face amount times the stated rate. 12%. That's what's actually written in the contract. So that's going to be the 12,000. That would be for a year. And if we divide that by two, it would be 6000. Other way we can do that. 0.1 to you, Really Rate divided by two. The six month rate. The time period. We're looking at times 100,000. That gives us the 6000 Then the bond interest calculation, however, is going to be calculated as the carrying amount 1035 46 times the market rate. The brake That's not on the bond The 0.1, the writ we used to determine what the price of the bond will be. And that's gonna be this divided by two. Because it's that would be for a year. We need six months, and there we have it. And again, of course, we could also calculate that as the 0.1 divided by two times, that would be the six month rate. The carrying amount 1035 46. And that would be the same number we're rounding up here. Okay, so then if we subtract thes two out, then we're going to say the 6000 minus 26 minus the 5177 It's gonna give us 28 23. So that's gonna be the 8 23 And then the Unadvertised premium then is going to go down by that a 23. So that's just gonna be the 3546 minus 23 or 2723 That's gonna be the to 7 to 3. And then the carrying amount is always just gonna be the 100,000 plus the Unadvertised premium to 7 to 3. So that will give us the 1027 23. So if we do this again, we're just gonna do the same thing. Just I'll do the calculations because it helps us just to pick up these numbers over here. So we're just gonna take the 100,000 times the stated rate. That rate on the bond, 12% divided by two they don't give us. The 6000 is gonna be the same, of course, each time period. So there's a 6000 and then we've got the bond interest, the bond interest always being calculated as the carrying value 1027 23 times the market rate 0.1 divided by two. And they don't give us this number. If we take the difference between the two, we take the 6000 minus 25136 we get the 8 64 And then, of course, the premium amount we're going to say was 27 to 3 minus 8 64 That's going to give us the 1859 So that would be the 1859 and then we're just gonna take always the face amount 100,000 plus the +1859 Which is gonna be, of course, one of one 8 59 So if we do this again, we'll say the 6000 again. It's obviously the same, but it's gonna be the 1000 times the stated rate divided by two. The bond interest is going to be the carrying amount times the market rate, divided by two of the difference between those two is the change the 907 And then the UN immortalized premium is gonna be this 8 1059 minus 2907 Guinness 95. This amount that is always gonna be the face about 100,000 plus the Unadvertised amount 100,009. 52 One more time. We got the 6000 face amount times they stated rate divided by two bond interest. The carrying amount times the market rate divided by two. The change is the difference between these two, and that's gonna be 9 52 Then we've got that bringing us down, Teoh zero at this time. And then, of course, they carrying amount is gonna be the 100,000 and zero, which is just gonna be the 100,000 now will record the first Couple Journal entries related to the interest and the amortization off the premium, just to see how this table then will relate. Teoh what would actually be done in terms of journal entries and in terms of the trial balance? So here's our Here's our table. We're going to say that now we're have the interest payments. Six months have passed and we've got to record the interest. So the first thing we know is happening is cash is being paid, so cash is going down. Cashes a debit balance will do the opposite thing to it will credit cash. We're gonna pay the 6000. That's what's actually going out. And again, that's gonna be the bond amount that's on the contract times that state rate divided by two . Cause it six months and then we're gonna pick up the bond interest expense from our table here, which will be 1 5077 and then the difference is going to be the premium which will be the 8 23 And of course, the 1 5077 and the 8 23 equal the 6000. So if we were to record this out. Then we're going to say that the bond interest is, uh, expense is going up by the 1 5077 even though we paid 6000 because we are, in essence, bringing it down by the premium. And that premium is a result of interest is the result of the difference between the stated rate and the market rate when we issued the bonds. So that's why that is happening. And then we're going to say that the premium is gonna go down by the 8 23 not an even amount each time. Because this is gonna be a more proper method in order. Teoh related to the carrying amount of the bond in a similar way that we would relate the note interests portion versus the premium on an installment note, and so that will give us our premium going down. And, of course, the premium now matches our table and then we have the cash going down. So if we look at what we have here in terms of our table, we're going to say that the bond is on the books for 100. The carrying amount is gonna be these two. We add them together. Ah 1027 23 matching this amount here. And, uh and so that's what we have there. And then, of course, the Unadvertised amount will be here. The interest brings net and come down, but the interest is not equal to the cash because of the premium being allocated. So if we did this one more time, we'll do another journal entry. It'll look very similar in terms of the accounts will be the same. But the amounts differ slightly because of our table because of using the effective method . So we're just gonna jump forward in time. So now it's another six months have passed. And so that's obviously when we do these problems, we have to jump forward in time here. So we're going to say we're paying another 6000 later for the interest. The bond interest portion, however, is only going to be 1 5036 because of the premium that we're going to allocate. Of the 8 64 this number plus this number will equal the 6000. So if we record this out, then the bond interest is going to go up in the deputy direction. We're going to say that the bond premium is gonna go down. And that bond premium now will match what's on our table, and then the cash is gonna go down to here. So what we have here for courses is the 100,000 payable plus the premium matching what is on our carrying amount on our table. The premium, of course. Also matching what is on our table. 19. 250 Leases Capital vs: in this presentation, we will take a look at lease is comparing and contrasting Capitalise versus an operating lease, thinking about when we would have to capitalize at least when we would have to call at least a capital league versus an operating lease. And what are gonna be the differences in terms of reporting a capitalise versus and operating lease? Most leases are going to be operating leases. When we think about elites, we typically think about an operating lease unless there's gonna be conditions that are met that will require us to record it as a capitalise. So let's take a look at the two differences in terms of recording. Just in general. What are the type of recording requirements for an operating lease and it capitalise? And then we'll talk more specifically about what those conditions will be in order to require us to record something at the capital lease, the operating leases what you would think, which that we're gonna lease something and then when we make the payment, we're going to record the payment of a credit to cash and when and then rent expense or lease expenses. What we have So in this case, It's really easy for us to record in terms of just journal entries. We can just say when we make the payment, that's when we record the expense. This would normally be the case because we assume, of course, when we least something that released a piece of equipment. We assume that that piece of equipment is not ours, but the the person who leased it to us, the lease or us as the li see are just using it and therefore the least payment is gonna be the expense related to us using the the property, the equipment in order to help us generate revenue. And therefore it would make sense for us to expense the use of the property as we use it in accordance with the matching principle. So that would be normal. That would be what we would think of as a normal lease situation here. However, it's possible to have a substance over form, type of least situation, in which case the lease is gonna could be set up as if it's elites making meaning we're gonna set up these least payments. However, in actuality in all, for all practical purposes, it's pretty much the same as if we purchased it, meaning I will take a look at more of the conditions. But if the lease is set up in such a way that we make payments equivalent to the amount of of the purchase price of the property that we're buying and we're guaranteeing to make those payments and the payments would look very similar as they would if we were to just by and financed the equipment, then that's one way we could look at it and say, Well, it looks like you set it up as a least, but in actuality, it looks like your your contract is such that's very similar to one that would be there if you purchased it. And therefore it looks to us more like it's something that you purchased, even though it's being set up as a lease now, why? Why would? Why would someone want to do that? Noticed that if we if we have, if we set up this situation here where we have an operating lease, then we're not recording any any liability on the books here, So notice we're just expensing things as we make the payment. However, if we purchased it If we were to purchase this piece of equipment, then we would have this liability on the books for the amount that we financed. And so it's possible that that AH company may not want to have the liability and therefore purchase a piece of equipment and have have it make it be theirs. They basically have ownership of it, however, set it up kind of like as at least so that the liability component won't be on the balance sheet. That's one reason that substance over form argument could happen, meaning something could be set up as a lease, although it's actually more of a purchase situation. If that's determined to be the case, we'll talk a little bit more about the types of conditions that could be met in order to Teoh. Have some things in substance be really a purchase when it's really when it set up kind of as a least. But if those conditions are met, then we'd have to we have to put down the books more as if we were to have purchased it, because really, that's what happened. If you look at the least, really looks like we actually purchased it so in substance. We did. And therefore, to be transparent on the financials, we should record it as a capital east. What does that mean? Well, that means that when we when we signed the lease, we want to put the asset, the equipment on the books as an asset as if we purchased it. So we're gonna put the basically the equipment on the books as if we purchased it, and then we'll credit an obligation under the capitalise. Meaning a liability. We're gonna credit a liability because we're treating this basically as if we're financing this piece of equipment. Kind of like if we bought it. So even though it's set up as a lease, we're gonna have to say substance wife, It looks like a purchase. And therefore, we're gonna put it on the books as an asset at the purchase time, and we're going to set up the liability. Now, we're not gonna get into a lot of detail in terms of how we're gonna get up. Get Teoh these numbers. What is the purchase price? There's different methods will have to determine you know what the actual purchase price is gonna be. But just in theory, note that, of course, we have to capitalize the asset rather than not having a capitalize and therefore also have to recognize the fact that we owe basically alone a liability on the books when we then make the payments. When we make the least payments and we've capitalized the lease, then we're gonna credit cast just as we would under the operating lease. But now, rather than record leads, expense as we would under the operating lease, were basically treating this as a loan were paying off the loan. So this is kind of like the loan payable accounts that we're calling obligation under capitalise. That's basically our financing account that we've recorded as a liability. We're paying part of that off, So we're gonna pay off the loan, and we're also gonna have an interest component that we've imputed. We figured out based on this this first information. When we recorded this first transaction, we assumed it was a purchased. We calculated this as if it was basically alone with an interest rate, and now when we're paying off making the payments, the cash is still going down. But the entire payment is not going to be going to an expense like lease expense. Its some of its gonna be expense. But that's gonna be for financing. It's gonna be in the interest expense. And then the rest of it's going to reduce this liability we set up just like if we financed it, just like if we have a loan on the books and then we also gonna have to deal with, of course, the depreciation related to this equipment. We put the equipment on the books, we've purchased it now. In a sense, it's a capitalise, which is like a purchase, and therefore we're gonna have to record the depreciation related toothy equipment as well , which is just normal, any kind of depreciation we would record for property, plant and equipment. We were debit appreciation, expensing credit, accumulated depreciation. So we can see, of course, that the operating laces is a lot easier for us toe to record and put on the books and most leases if it's just renting and if it's truly renting and what we're renting is is not our property, but it's the property of the lease or and we're just leasing it for, ah, time, period. And then we're gonna get a normal rent situation, then this would be appropriate. And again, the capital is really happens when substance over form substance, meaning in substance where pot were buying the thing. That contract is such that it seems a lot more like a purchase than it does a lease. And therefore to be transparent, to really report properly, we should put it on the books has the purchase. So when would we have to do this? When we have to do this capitalise. Well, there's a cut, a couple conditions and you can kind of think of him yourself. Like what? What would have to be met in order for something to be substantially in substance at purchase, Whereas inform the document that was put together. It just looks like a lease. Well, maybe the Lea si automatically gains ownership of the asset of the end of the lease. That would look a whole lot like a purchase, right? I mean, if the least says you're guaranteeing these payments and then at the end of the lease, we're just gonna give you the thing, right? The equipments, yours at the end of the lease. Well, then, at no point in time there's no, you know, was the least Was the equipment really someone else Were we own it? We that this person that Lea si owns it in essence has control over it is using it. And then at the elite end of the lease term, they're gonna transfer the ownership to that from the lease or to the Lea Si. Well, it looks a lot like that. Lea si basically has control of it the whole time. If that's the case. So if this was the case, then you probably would say we would probably say, Well, yeah, You have to record that at the capital asset when you make the least at the beginning of the lease because it looks a whole lot like in substance to purchase rather than than a rental. Another word, if with the least, uh, Khaleesi can buy the asset at a bargain price at the end of the lease. So obviously you can you can just think of it. If you wanted to get around this 1st 1 you can think well, maybe they don't get it for free at the end of the of it. But maybe we could give him you know they have to pay me a dollar for it. Well, obviously a dollar seems ah, whole lot under what the value? I mean, they would. So if if they're gonna pay something that's very small at the end of the lease term in comparison to the value of the piece of property, then again, that would still seem like, Well, that seems like they would do that for sure. And therefore, it looks like it's still going to be a capitalise in that case, because again, the person the Lea Si basically has ownership through the whole thing. And there's no way they're not gonna pay a bargain purchase price like a dollar at the end of the time period in order to purchase the piece of equipment. Ah, and then the least runs 75% or more of the assets. Useful life. So and this is kind of an arbitrary number 75%. But you can you can think what what they're trying to say here. What we're trying to say is, Well, I mean, if you're leasing, if you're guaranteed the least, if you sign an agreement that I'm gonna I'm gonna own this car for, you know, 10 years in the life of the cars. 10 years and there's no way to get out of the least. You basically purchased it because you're you're the least term is is as long as the life term. So if that's the case, then you basically leased it for the entire life. And that would seem Maurin form like a purchase than at least. Ah, President. Value of lease payments is at least 90% of the assets fair market value, So this would be just based on price. So if we if we were to try to look at the least payments, what we would have to do is use present value. We would have to say, OK, if you have, you know, you got these payments that you're gonna make for so much a term of the lease and we know exactly you know what's required to be paid, then we can We can try to figure out then what the present value of those least payments are. And if the present value of at least payments are are 90% of the of the fair market value of the equipment, then again it would look a whole lot like you've signed something, you've agreed to something that looks like a purchase rather than a lease. So again, you can kind of derive these type of things when you try to think of it. The substance over forms argument we're trying to say, You know, it's possible that some people might have an incentive to set something up as, ah, as the least as opposed to a purchase. Inform when, in actuality, they want, Ah, purchase agreement. And so and if you think in those terms and you look through agreements skeptically trying to say, OK, let's see what kind of conditions would be met. You probably come to some of these conditions when, when you know the least, obviously looks a whole lot like a purchase or it's set up pretty much as if one person the least he has complete control over the equipment. Then you would think, OK, it looks pretty much like in substance. The this is going to be a purchase and therefore a capitalise rather than just a lease, which would be a normal operating lease