Intermediate II - Chapter 14 - 1 Bonds

00:27:58
https://www.youtube.com/watch?v=_-4qqgCkjKc

Summary

TLDR本章节讲解了债券及长期票据的基本概念与分类。债券被视为公司对投资者的债务，必须在到期时偿还面值并支付定期利息。债券的面值、定期利息及相关术语（如票面价值、名义利率等）均得到介绍。重点讨论了不同类型的债券：如未经担保的债券、抵押债券、可转换债券和可赎回债券，强调了债务在公司财务报表中的记录方式，以及市场利率如何影响债券的发行价格。通过例子解析了债券折扣的计算方法，实际利息的计算，以及摊销过程的关键要点。

Takeaways

  • 📊 了解债券的基本概念和分类
  • 💰 债券的面值和定期利息的重要性
  • 🔑 债券类型：未担保、抵押、可转换、可赎回
  • 💸 市场利率与债券成交价的关系
  • 📉 如何计算债券的折扣和溢价
  • 📚 重要术语：票面价值、名义利率
  • 💼 债务在公司财务报表中的呈现
  • 📝 记录债券发行的会计条目
  • ✔️ 理解实际利息的计算方法
  • 💡 摊销债券折扣的计算方式

Timeline

  • 00:00:00 - 00:05:00

    在本次讲座中，我们介绍了第14章的内容，讨论了债券和长期票据。特别关注了债券的特性、不同类型及相关术语，让学生了解债券的基本结构，包括面值、利息支付、债务义务等。

  • 00:05:00 - 00:10:00

    债券一般由发行公司发出，投资者然后获得债券意味着他们对公司有债务权益。我们介绍了一些术语，如面值、票面利率、债券契约以及债务的法律约束力等，突出债券是安全的投资工具，但令投资者承担风险。

  • 00:10:00 - 00:15:00

    讨论了几种债券类型，包括无担保债券（debenture bonds）仅依赖发行公司的信用，无需具体资产作为担保；抵押债券（mortgage bonds）则以特定房地产作担保，降低了风险及对应利率。

  • 00:15:00 - 00:20:00

    可转换债券允许投资者将债券转换为公司股票，呼叫债券让公司在规定时间内回购债券，以及设立偿债基金确保债务的还款能力。这些都影响债券的设计和投资吸引力。

  • 00:20:00 - 00:27:58

    最后，通过Masterwhere Industries的例子，说明了如何计算债券的实际售价，以及如何通过现值法评估现金流的现值，让学生在理解债务管理时具备必要的会计知识，以便更好地录入和报告债务交易。

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Mind Map

Video Q&A

  • 什么是债券的面值？

    债券的面值是指在到期日发行公司需偿还给投资者的金额，也称为本金、票面价值或到期价值。

  • 如何计算债券的实际利息？

    实际利息使用市场利率与未偿还本金相乘的方式来计算。

  • 债券可以有哪些不同类型？

    债券可分为未担保债券、抵押债券、可转换债券、可赎回债券等。

  • 如何判断债券是以溢价还是折扣成交？

    如果债券的市场利率高于票面利率，则通常以折扣成交；反之，以溢价成交。

  • 什么是债券的折扣和溢价？

    债券折扣是指债券售价低于面值，而溢价则是售价高于面值。

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  • 00:00:01
    hello everyone we are
  • 00:00:03
    starting chapter 14 in intermediate
  • 00:00:06
    accounting in this lecture
  • 00:00:08
    so we're going to be talking about bonds
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    and long
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    term notes in chapter 14. for this
  • 00:00:14
    lecture we're going to do some recap
  • 00:00:16
    on an example of a discount on a bond
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    and we're also going to talk about some
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    details
  • 00:00:22
    about bonds that we haven't discussed
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    before so
  • 00:00:25
    stay tuned to this lecture and then
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    we'll have several more to finish out
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    chapter 14.
  • 00:00:32
    okay so um with a bond
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    in general we have the issuing
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    corporation now remember
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    bonds are debt so this is not where
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    the investor has any equity in the
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    company
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    they oh they have a bond that means that
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    the
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    issuing company owes them something
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    the issuing company is in debt they are
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    obligated
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    to repay the investor
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    so the face amount at the specified
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    maturity date
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    has several different names that you may
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    hear it called so i want to make sure
  • 00:01:12
    you're familiar with those names the
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    face amounts can be called the principal
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    the par value stated amount
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    or maturity value all of those have the
  • 00:01:23
    same
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    meaning that is the amount at the
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    maturity date
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    that the investor is going to get from
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    the issuing company that is the amount
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    of
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    debt that the issuing company has to pay
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    to the investor
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    whenever the bond comes due when the
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    maturity date comes
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    then you also have periodic interest
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    that is money that is paid from the
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    issuing corporation
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    to the investor for the time between the
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    issuing date
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    and maturity so this is going to be
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    a lot of times paid every six months to
  • 00:02:02
    the investor
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    to the one who who owns the bond
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    before they actually get to the maturity
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    date so
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    other words for this periodic interest
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    would be stated rate
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    coupon rate or nominal rate so when we
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    say those words
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    we're talking about that interest that
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    the investor
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    earns on the bond in between the time
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    that they bought the bond that it was
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    issued
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    and the time that it matures the time
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    they actually get their
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    face amount back all right so a few
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    definitions i want to cover here about
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    bonds before we go into some examples
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    of a bond a bond indenture
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    this is not something that your dentist
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    does to you this is not anything to do
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    with your mouth
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    this is a specific promise
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    made to bondholders this is like a legal
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    agreement from the issuing company to
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    the bond holders to the investor
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    with all the legal terms that is
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    typically
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    held by a trustee that might be a bank
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    or some kind of financial institution
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    they are the trustee is appointed by the
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    issuing firm
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    to represent the rights of the bond
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    holder
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    if the company the issuer fails to live
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    up to the terms of the bond and denture
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    they don't live up to their agreements
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    then the trustee may bring legal action
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    against the company so it's serious this
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    is
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    debt that is serious that the bondholder
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    has rights
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    and the issuing company has to live up
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    to the terms that they agreed to
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    all right we have several different
  • 00:03:44
    types of bonds that i want to discuss
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    with you
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    so first is a debenture bond that sounds
  • 00:03:51
    a lot like the
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    indenture but this is debenture
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    so with a debenture bond it is secured
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    only by the full faith and credit of the
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    issuing corporation
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    meaning you don't have any actual
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    collateral
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    for this bond so if for some reason the
  • 00:04:10
    issuing company does not pay
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    there's not some asset to back it up
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    and you'll see some other examples of
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    bonds that do have assets to back them
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    up
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    but basically this full faith and credit
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    it's gonna need to be a company that
  • 00:04:27
    people feel like they can trust and they
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    feel like they are going to live up to
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    what they say they're going to do and
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    they are going to pay their interest and
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    they are going to pay that face amount
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    at the maturity date because there isn't
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    anything else to back up
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    the fact that if they were to
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    not pay those amounts that they owe so
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    there's no specific assets that are
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    pledged as security for these
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    investors have the same standing as the
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    firm's
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    other general creditors so any other
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    creditors
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    um are the same the same level as far as
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    them getting their money
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    if they were to go bankrupt or something
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    like that
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    all right so here mortgage bonds this is
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    a good example
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    of a bond that does have something to
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    pledge for security
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    so mortgage bonds are backed by a lien
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    on specific real estate okay
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    so if you are getting a bond from a
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    company that issues home loans
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    then it is backed up by those loans if
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    for some reason
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    we don't pay you us as the issuers do
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    not pay you as the bondholder
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    then you can have these specified this
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    real estate you can have these loans or
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    this specific
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    real estate itself so this would be less
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    risky for sure because there is
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    something backing it up
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    so because it's less risk just like with
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    pretty much every investment it
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    typically commands a lower interest rate
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    with almost every investment that you
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    see whether you're in the business world
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    or in your personal life
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    the riskier it is the higher the
  • 00:06:08
    interest rate the higher potential of
  • 00:06:10
    return
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    that's what you get for being willing to
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    take the risk
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    if it's not as risky you're most likely
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    not going to get as much of a return but
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    there's obviously pros and cons both
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    ways
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    all right convertible bonds the bond
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    itself can be converted into shares of
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    stock
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    the amount of stock that you could get
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    for that bond would be specified
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    beforehand you would know how much you
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    would be able to convert
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    that bond into for shares of stock so if
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    you decide
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    instead of having debt for
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    from this issuing company i think i want
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    some of their stock i think i want
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    to have some equity in the company and
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    that may make sense depending on where
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    the stock market is falling
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    at the time all right a few more types
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    of bonds
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    callable bonds so callable bonds they
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    have a feature that allows the issuing
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    company
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    to buy back or call
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    the bonds before their scheduled
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    maturity date
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    okay so whenever the issuing company is
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    ready they are allowed to
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    go ahead and say you know what here's
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    your face amount
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    i no longer want to be indebted to you
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    the call price must be pre-specified
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    and often exceeds the bonds face amounts
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    so
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    if they decide to go ahead and call that
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    bond before the maturity date
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    then there's going to be a pre-specified
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    amount that they'd have to pay
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    and like it says here a lot of times
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    they have to pay even more
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    than that face amount because you know
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    the company the bondholder is going to
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    be losing out on interest
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    and it may be inconvenient for the
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    timing
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    so they have to the issuing company has
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    to
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    pay something extra for that for putting
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    them
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    out of that interest and everything
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    all right a sinking fund sinking fund
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    redemptions that's where the corporation
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    may be required to redeem the bonds on a
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    pre-specified
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    year by year basis so a sinking fund
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    is a fund that a corporation may be
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    putting
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    money to the side for specific use
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    like for to pay these bonds back so
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    we don't want to just hope we have
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    enough money
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    whenever these bonds mature so
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    every year we are going to put aside x
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    amount of money so that at the end
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    of this bond's life whenever it matures
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    we will have the money set aside in the
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    sinking fund
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    all right and finally cereal bonds
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    so this is not lucky charms this is
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    retired installments cereal as an
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    installment during all or part of the
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    life of the issue
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    with each bond having its own specified
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    maturity date
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    so in other words this is a bond
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    that instead of having one maturity date
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    where the
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    bondholder receives the face amount
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    there are several installments where
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    they will receive
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    portions of it until they then have all
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    of the face amount
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    at the end of the the installments
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    okay so whenever companies record the
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    bonds when they're issued
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    it depends on if you are the corporation
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    that's issuing the bond
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    or the investor who is the bond holder
  • 00:09:38
    who's buying the bond
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    if it's the corporation that's issuing
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    the bond they're going to record a
  • 00:09:44
    liability
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    so yes we were able to bring in some
  • 00:09:47
    cash because somebody
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    loaned us some money through this bond
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    it's debt but that means we have a
  • 00:09:52
    liability to pay it back
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    so that's for the issuing company for
  • 00:09:57
    the investor who buys the bond as an
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    investment
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    they're going to report it as an asset
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    and they
  • 00:10:05
    are going to get paid in the future for
  • 00:10:07
    this bond they're going to
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    send cash out but they're also going to
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    have an asset for this investment
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    so let's look at an example this is a
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    very um recognizable example we've seen
  • 00:10:19
    in some other chapters chapter 12
  • 00:10:22
    you're going to really recognize this
  • 00:10:25
    bond process but this is good review
  • 00:10:28
    so we'll go back through it because it
  • 00:10:29
    can be a confusing process
  • 00:10:32
    whenever you are recording a bond
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    discount or a premium
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    so as we go through this masterwhere
  • 00:10:38
    industries example again
  • 00:10:40
    hopefully it will help you if you were
  • 00:10:42
    not understanding completely
  • 00:10:44
    in chapter 12. so on january
  • 00:10:47
    1st 2018 masterwhere industries issued
  • 00:10:52
    excuse me 700 000 of 12
  • 00:10:55
    bonds interest of 42 000 is payable
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    semi-annually on june 30th and december
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    31st
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    so they took that 700 000 times 0.12
  • 00:11:07
    12 and that told us that
  • 00:11:11
    we were going to pay 42 000 twice a year
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    because most
  • 00:11:15
    time bonds are going to pay you twice a
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    year semi-annually
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    so they're going to get paid 42 000 in
  • 00:11:20
    interest on june 30th
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    and december 31st just a little recap of
  • 00:11:24
    what that said
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    the bond matures in three years
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    the entire bond issue was sold in a
  • 00:11:32
    private placement to united intergroup
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    at the face amount okay so in this first
  • 00:11:39
    example
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    united inner group bought the whole
  • 00:11:44
    issuance of seven hundred thousand
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    dollars worth of bonds
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    at face amount so they paid the full
  • 00:11:50
    seven hundred thousand for those
  • 00:11:52
    so master where the issuer has
  • 00:11:55
    a debit cash because they brought in
  • 00:11:57
    cash for seven hundred thousand
  • 00:11:59
    and then they create that liability with
  • 00:12:01
    the credit to bonds payable for seven
  • 00:12:04
    hundred thousand
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    however the investor united they are
  • 00:12:08
    going to record
  • 00:12:10
    an asset they record an investment in
  • 00:12:13
    bonds with a debit
  • 00:12:14
    so that was creating an asset for 700
  • 00:12:17
    000
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    and then they gave cash to master ware
  • 00:12:22
    to borrow for 700 000 so that would be a
  • 00:12:24
    credit because we're decreasing
  • 00:12:26
    cash
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    all right determining the selling price
  • 00:12:32
    again we
  • 00:12:33
    looked at this in chapter 12 but this is
  • 00:12:35
    going to be a little recap
  • 00:12:37
    it won't hurt to go back over this
  • 00:12:39
    challenging concept
  • 00:12:41
    and if you already have it from chapter
  • 00:12:43
    12 then awesome
  • 00:12:44
    you are ahead of everybody else most
  • 00:12:47
    likely
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    but it still could be helpful to listen
  • 00:12:50
    to it again so
  • 00:12:52
    bonds will sell for more than the face
  • 00:12:55
    amount
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    or less than the face amount depending
  • 00:12:59
    on that 12 percent in the example
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    stated interest rate how that compares
  • 00:13:04
    to the market rate
  • 00:13:05
    or the effective interest rate
  • 00:13:08
    so if it sells for more than the face
  • 00:13:12
    amount that means it's selling at a
  • 00:13:14
    premium
  • 00:13:15
    if it sells for less than the face
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    amount it's selling at a discount
  • 00:13:19
    so we know we have a stated interest
  • 00:13:22
    rate of 12 percent
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    so we see that in all all the way down
  • 00:13:25
    here
  • 00:13:26
    we have 12 percent that's what it tells
  • 00:13:28
    us in the example the bond is paying
  • 00:13:30
    12 on that 700 thousand dollars
  • 00:13:35
    the market rate if it was twelve percent
  • 00:13:38
    as well
  • 00:13:39
    then they would pay the face amount
  • 00:13:41
    which was what we saw in this
  • 00:13:43
    on the slide before this so if our
  • 00:13:46
    stated interest rate is the same as the
  • 00:13:48
    market interest rate
  • 00:13:49
    then awesome we have the face amount
  • 00:13:54
    it's not being sold at less or more but
  • 00:13:57
    if our stated interest rate is 12 and
  • 00:14:00
    the market rate is 14
  • 00:14:02
    so we are not paying as high as a of a
  • 00:14:05
    percentage
  • 00:14:06
    as they could find in other in other
  • 00:14:08
    spots in the market
  • 00:14:10
    then we are going to have to sell our
  • 00:14:11
    bond at a discount
  • 00:14:13
    meaning they would not have paid us the
  • 00:14:15
    full 700 000
  • 00:14:17
    for that bond because we are not paying
  • 00:14:19
    as much interest
  • 00:14:21
    as they can find in other places at the
  • 00:14:23
    time
  • 00:14:24
    now if we're paying 12 and the market's
  • 00:14:27
    only paying 10
  • 00:14:28
    so we're actually paying more than most
  • 00:14:30
    people then we can sell it at a premium
  • 00:14:33
    we could sell it more than the 700
  • 00:14:35
    000 because we are paying higher
  • 00:14:37
    interest rate
  • 00:14:39
    i'm not going to go into detail about
  • 00:14:41
    all these bond ratings
  • 00:14:42
    but bonds are they do each have a rating
  • 00:14:46
    depending on what kind of grades they
  • 00:14:48
    are whether or not they are
  • 00:14:50
    high risk again so
  • 00:14:53
    the higher the risk the
  • 00:14:57
    higher the um the interest rates going
  • 00:15:00
    to be or the less they're going to sell
  • 00:15:02
    the
  • 00:15:02
    bond for so if the risk of the
  • 00:15:05
    corporation itself
  • 00:15:07
    is low then the price of the bonds are
  • 00:15:09
    going to be higher
  • 00:15:10
    because the less risky the more you're
  • 00:15:14
    going to have to
  • 00:15:15
    pay for that the more risky it is the
  • 00:15:18
    more of a discount you're going to get
  • 00:15:20
    it could be the corporation as a whole
  • 00:15:22
    is risky or it could be the certain type
  • 00:15:25
    of bonds they have
  • 00:15:26
    are risky but either way there's going
  • 00:15:29
    to be ratings on each bond
  • 00:15:33
    all right so determining the selling
  • 00:15:36
    price this will be
  • 00:15:37
    a repeat from chapter 12 but again
  • 00:15:40
    good practice so to figure out the bond
  • 00:15:43
    price
  • 00:15:44
    we would take the present value of the
  • 00:15:47
    principal
  • 00:15:48
    payable at maturity so we know in this
  • 00:15:51
    example it was 700 thousand that's going
  • 00:15:53
    to be paid
  • 00:15:54
    at maturity but we got to figure out the
  • 00:15:55
    present value of that
  • 00:15:58
    plus the present value of the periodic
  • 00:16:01
    cash
  • 00:16:02
    payments okay so that interest those
  • 00:16:04
    interest payments okay
  • 00:16:06
    so that's going to give us the
  • 00:16:07
    discounted at the market rate which in
  • 00:16:10
    this case it's going to be a discount
  • 00:16:12
    that we're selling it at
  • 00:16:15
    and it's going to be then the face
  • 00:16:17
    amount
  • 00:16:18
    times the stated rate so the bond
  • 00:16:22
    prices are typically stated in terms of
  • 00:16:24
    a percentage
  • 00:16:26
    of the face amounts so what what do i
  • 00:16:28
    mean by that
  • 00:16:30
    let's say for example a price quote of
  • 00:16:33
    98 means that
  • 00:16:36
    a thousand dollar bond will sell for
  • 00:16:39
    nine hundred and eighty dollars
  • 00:16:42
    a bond price at 101 means that thousand
  • 00:16:45
    dollar bond is gonna sell for one
  • 00:16:47
    thousand
  • 00:16:48
    ten dollars so when you say
  • 00:16:51
    um we're quoting you at 98 that's just
  • 00:16:53
    saying
  • 00:16:54
    you're going to have to pay the
  • 00:16:55
    discounted rate of 98
  • 00:16:58
    of the bonds face amount if you're
  • 00:17:01
    paying 101 or anything over 100
  • 00:17:03
    then that means you're going to be
  • 00:17:04
    paying a premium you're going to pay
  • 00:17:07
    101 times the face value
  • 00:17:11
    of the bond
  • 00:17:14
    so you might hear it stated that way all
  • 00:17:16
    right so back to our example
  • 00:17:18
    masterwhere issues 700 000 for 12
  • 00:17:21
    percent
  • 00:17:22
    so that means that you're going to get
  • 00:17:24
    42 000 twice a year june 30th and
  • 00:17:27
    december 31st
  • 00:17:29
    the bond does mature in three years the
  • 00:17:32
    market yield for the bond at a
  • 00:17:34
    similar risk in maturity so that market
  • 00:17:36
    yield would be
  • 00:17:37
    14 percent so the entire bond issue
  • 00:17:41
    was purchased by united inner group so
  • 00:17:44
    if the market would normally give us 14
  • 00:17:47
    and we're only offering 12 that means we
  • 00:17:50
    have to sell that 700
  • 00:17:52
    000 bond we as a master wear for a
  • 00:17:55
    discounted price so we're actually gonna
  • 00:17:57
    get less than the 700 000
  • 00:18:00
    and here's how we're going to calculate
  • 00:18:01
    it
  • 00:18:03
    first we're going to find the interest
  • 00:18:07
    at present value so we know every six
  • 00:18:09
    months
  • 00:18:10
    the interest that united is going to get
  • 00:18:13
    is 42 000.
  • 00:18:15
    we're going to use the present value
  • 00:18:18
    table of an
  • 00:18:19
    ordinary annuity okay we want to know
  • 00:18:21
    the present value
  • 00:18:23
    and the interest is paid period after
  • 00:18:26
    period
  • 00:18:27
    after period that is an annuity it's not
  • 00:18:30
    a
  • 00:18:30
    one-time payment it's paid over and over
  • 00:18:32
    again that is called an annuity
  • 00:18:35
    so you would go to the present value of
  • 00:18:37
    an ordinary
  • 00:18:38
    new annuity table
  • 00:18:41
    it's going to be six periods because
  • 00:18:44
    that 42 000 is paid
  • 00:18:46
    six times three years but each year
  • 00:18:50
    they get two payments so you would go to
  • 00:18:52
    period six
  • 00:18:54
    and an interest rate of seven percent
  • 00:18:57
    that's because you're getting half of
  • 00:18:59
    the interest
  • 00:19:01
    every six months so you're going to use
  • 00:19:03
    the
  • 00:19:04
    market interest rate of 14 divided by
  • 00:19:07
    two
  • 00:19:08
    since it's every six months instead of
  • 00:19:10
    once a year
  • 00:19:11
    that would give us the present value of
  • 00:19:15
    an ordinary annuity of 4.76654
  • 00:19:19
    you get that off of the present value of
  • 00:19:22
    an annuity
  • 00:19:23
    chart so you multiply that interest that
  • 00:19:26
    you're going to get
  • 00:19:27
    six different times by that
  • 00:19:30
    present value amount and that was again
  • 00:19:33
    using the market yield not the stated
  • 00:19:37
    interest rate so that tells us the
  • 00:19:39
    present value of the interest
  • 00:19:42
    that will be received by united
  • 00:19:45
    is going to be two hundred thousand not
  • 00:19:48
    one hundred and ninety five dollars
  • 00:19:51
    then we also need to find the present
  • 00:19:53
    value of the principal
  • 00:19:54
    we're going to use the same factors six
  • 00:19:57
    periods
  • 00:19:58
    times seven and seven percent for the
  • 00:20:01
    same reasons
  • 00:20:02
    but we're only doing the present value
  • 00:20:04
    of one dollar
  • 00:20:05
    it's not the present value of an annuity
  • 00:20:07
    of one dollar because
  • 00:20:08
    the 700 000 is only going to be received
  • 00:20:11
    once
  • 00:20:12
    and it's going to be received six
  • 00:20:15
    periods from now
  • 00:20:16
    okay so six six month periods from now
  • 00:20:20
    so that would give us the factor of
  • 00:20:22
    point six six six
  • 00:20:23
    three four which gives us four hundred
  • 00:20:26
    sixty six thousand dollars four hundred
  • 00:20:28
    and thirty eight
  • 00:20:29
    you add those two together you would get
  • 00:20:32
    six hundred sixty six thousand six
  • 00:20:35
    hundred and thirty three dollars
  • 00:20:37
    that is the present value of the bond
  • 00:20:41
    so that is the price that the issuer is
  • 00:20:44
    actually going to receive
  • 00:20:46
    for these bonds they're issuing
  • 00:20:49
    okay this is another little good example
  • 00:20:51
    of a way to look at this
  • 00:20:53
    okay so the top half here is the
  • 00:20:55
    calculation we just did
  • 00:20:57
    but just to help us understand that
  • 00:20:59
    present value of cash flows
  • 00:21:02
    every six months the
  • 00:21:05
    issuer is going to give the bondholder
  • 00:21:07
    forty two thousand dollars in interest
  • 00:21:09
    okay so that's one
  • 00:21:10
    two three four five six
  • 00:21:13
    times every six months they get forty
  • 00:21:16
    two thousand
  • 00:21:16
    that's six times that's why we chose
  • 00:21:19
    period six
  • 00:21:20
    so the present value of that
  • 00:21:23
    is two hundred thousand one hundred
  • 00:21:25
    ninety five dollars
  • 00:21:27
    and then the same thing goes for the 700
  • 00:21:30
    000 we get that in three years or six
  • 00:21:33
    periods the way we're doing it here
  • 00:21:36
    which the present value we calculated is
  • 00:21:39
    466
  • 00:21:41
    438 that's the value of it today
  • 00:21:45
    so when you add those two present values
  • 00:21:48
    up
  • 00:21:48
    it gives you the present value of the
  • 00:21:50
    interest and the principles that's just
  • 00:21:52
    a little visual
  • 00:21:53
    of the calculation we just did so
  • 00:21:55
    hopefully if you're struggling with that
  • 00:21:56
    that will help you out everybody learns
  • 00:21:58
    differently
  • 00:21:59
    and that can be a good way to help you
  • 00:22:00
    out
  • 00:22:03
    all right so this is the same
  • 00:22:04
    information same information we know
  • 00:22:06
    nothing new there
  • 00:22:07
    let's look at the um journal entry
  • 00:22:10
    since it is at a discount okay so we
  • 00:22:12
    know that master where which is the
  • 00:22:15
    issuer the one that is issuing the debt
  • 00:22:17
    the bond
  • 00:22:19
    is going to now have a bond payable of
  • 00:22:22
    700 000
  • 00:22:23
    why because that's the face amount that
  • 00:22:26
    is the amount that they are going to
  • 00:22:27
    have to pay united
  • 00:22:29
    at the maturity date in three years
  • 00:22:33
    they are only going to bring in cash
  • 00:22:35
    however at the
  • 00:22:36
    discounted amount that we calculated
  • 00:22:40
    on that previous slide okay so that's
  • 00:22:43
    the cash they're going to bring in
  • 00:22:44
    the difference between the two is going
  • 00:22:46
    to be a debit
  • 00:22:47
    to discount on bonds payable
  • 00:22:51
    so that's the entry recorded for the
  • 00:22:54
    issuer
  • 00:22:55
    the first entry we saw several slides
  • 00:22:58
    ago
  • 00:22:59
    was if it was issued at 12
  • 00:23:02
    and the market was 12 then we would have
  • 00:23:05
    gotten face
  • 00:23:06
    the face value but since that's not the
  • 00:23:08
    case and there's a discount
  • 00:23:10
    this is how you would make the entry for
  • 00:23:13
    the date of issuance
  • 00:23:15
    and then for the investor
  • 00:23:19
    they are going to have an investment of
  • 00:23:21
    the full seven hundred thousand because
  • 00:23:22
    that's the face amount that's how much
  • 00:23:24
    they're going to get at maturity
  • 00:23:26
    and then they record that cash went out
  • 00:23:28
    with a credit for the 666
  • 00:23:31
    000 and then they record the discount
  • 00:23:35
    on the bond as a credit as well
  • 00:23:38
    [Music]
  • 00:23:40
    so basically it was the opposite entries
  • 00:23:44
    there
  • 00:23:45
    all right so determining interest the
  • 00:23:47
    effective
  • 00:23:48
    interest method so this refers to
  • 00:23:50
    recording interest
  • 00:23:52
    each period as the effective market rate
  • 00:23:55
    of interest
  • 00:23:56
    multiplied by the outstanding balance
  • 00:24:00
    so in our previous illustration the
  • 00:24:03
    amount of debt
  • 00:24:04
    was that six hundred sixty six thousand
  • 00:24:07
    the effective interest rate was fourteen
  • 00:24:09
    percent because that's what the market
  • 00:24:11
    yield was
  • 00:24:12
    the interest recorded as an expense to
  • 00:24:15
    the issuer
  • 00:24:16
    and his revenue to the investor for the
  • 00:24:18
    six month interest period is calculated
  • 00:24:20
    like this okay so this is going to be
  • 00:24:23
    the effective interest we know that
  • 00:24:25
    they're bringing in 42 thousand dollars
  • 00:24:27
    every six months but what is the
  • 00:24:29
    effective interest okay and this is
  • 00:24:31
    going to look familiar also from chapter
  • 00:24:33
    12 but kind of a
  • 00:24:34
    different way of presenting it so it
  • 00:24:36
    might help you out
  • 00:24:38
    so we have the outstanding balance it's
  • 00:24:41
    not the face amount
  • 00:24:42
    it's the outstanding balance at that
  • 00:24:45
    time
  • 00:24:46
    times the effective interest rate which
  • 00:24:49
    is going to be the market rate
  • 00:24:51
    divided by two since it's paid every six
  • 00:24:54
    months
  • 00:24:56
    that is going to give us an effective
  • 00:24:58
    interest rate of forty six thousand
  • 00:25:00
    six hundred sixty four dollars forty two
  • 00:25:04
    thousand is the actual cash paid
  • 00:25:06
    but this forty six thousand is going to
  • 00:25:08
    be the effective interest rate
  • 00:25:10
    that is going to bring down the discount
  • 00:25:13
    each period
  • 00:25:14
    so does this look familiar to you this
  • 00:25:15
    amortization schedule for a discount
  • 00:25:18
    we have the outstanding balance as of
  • 00:25:21
    the beginning we have our interest rate
  • 00:25:25
    that is actually
  • 00:25:26
    paid that cash amount it's really a six
  • 00:25:29
    percent because
  • 00:25:30
    it's twelve percent for the year but
  • 00:25:31
    it's every six months
  • 00:25:34
    um then you're going to take the seven
  • 00:25:36
    percent this is the entry we just looked
  • 00:25:38
    at
  • 00:25:38
    to figure out the effective interest
  • 00:25:40
    that seven percent which was 14
  • 00:25:43
    market rate divided by two times that
  • 00:25:47
    outstanding balance
  • 00:25:49
    that gives you the effective interest
  • 00:25:51
    rate the difference between the
  • 00:25:53
    effective interest rate
  • 00:25:55
    and the actual cash interest
  • 00:25:58
    is going to be an increase in the
  • 00:26:01
    discount
  • 00:26:02
    okay so the balance of the discount so
  • 00:26:03
    it was 666
  • 00:26:05
    633 then we're going to add that
  • 00:26:08
    difference
  • 00:26:09
    and now the outstanding balance is 671
  • 00:26:13
    297 okay so
  • 00:26:16
    we look here we got the 42 000
  • 00:26:19
    came from six percent of 700 000 we know
  • 00:26:22
    how we got that 46
  • 00:26:24
    000 the effective interest rate the
  • 00:26:26
    difference between the two
  • 00:26:28
    is the 4 664
  • 00:26:32
    we add that amount to our outstanding
  • 00:26:34
    balance and we now have a new
  • 00:26:35
    outstanding balance
  • 00:26:37
    the discount has been reduced
  • 00:26:40
    increasing the outstanding balance
  • 00:26:43
    you will do this each year
  • 00:26:47
    so the next year it's or each six every
  • 00:26:49
    six months every period
  • 00:26:50
    every time you get paid interest so
  • 00:26:52
    again you get forty two thousand dollars
  • 00:26:55
    in interest
  • 00:26:55
    united would then they would take
  • 00:26:59
    the effective interest rate times the
  • 00:27:02
    new
  • 00:27:02
    outstanding balance they got that from
  • 00:27:04
    the line above
  • 00:27:06
    that would give us the effective
  • 00:27:08
    interest rate for this period
  • 00:27:10
    the difference between the effective
  • 00:27:14
    interest rate
  • 00:27:14
    and the interest rate is going to be
  • 00:27:17
    4991 in the second period
  • 00:27:20
    we add that difference to the
  • 00:27:23
    outstanding balance from the prior time
  • 00:27:26
    and that gives us our new outstanding
  • 00:27:28
    balance so we do that each time
  • 00:27:30
    then after our six periods
  • 00:27:34
    we're going to be up to that 700 000
  • 00:27:38
    which is the amount that they would
  • 00:27:39
    actually receive
  • 00:27:41
    at the maturity date so i'm actually
  • 00:27:44
    going to stop there we will go into
  • 00:27:46
    the rest of the information starting in
  • 00:27:50
    the next
  • 00:27:50
    lecture so i hope you understood that
  • 00:27:54
    but if you didn't please feel free to
  • 00:27:56
    reach out
Tags
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