Video: Bond Issuance at Discount

In this lesson, Nick Palazzolo, CPA, delves into the intricacies of bond issuance at a discount. With Stark Inc. as a case study, he showcases how to calculate the issue price and record the initial journal entry when bonds are sold below their face value. Nick emphasizes the importance of understanding the difference between the cash received and the bonds payable account, and introduces the straight-line method of bond discount amortization. He further explains how to record periodic interest payments and the adjustment of the discount on bonds payable over time, simplifying the nuances of the amortization process. By using comparison and clear-cut examples, Nick ensures that the concept of bringing a bond's carrying value back up to its face value over the life of the bond is well comprehended.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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That's a discount. That very much looks like a discount there, but not to be worried about, right? We will see it, we will demystify, and you should not be concerned. So if Stark Inc. issues 1.5 million bonds on January 1st of Year Five, same dates, same everything.

I like comparables, right? We can just compare each question. We change one thing, what happens? So at .97, we know it's at a discount because of that. And right away, what am I thinking?

Well, the cash we're going to receive, it's 1.5 million times 0.97. And that's going to give us our discount, right. The amount of cash we're actually receiving, only one million four hundred fifty five thousand. And this is the journal entry at issuance, right? This should be super straightforward.

It should come into your mind as soon as you see the question. You know exactly the journal entry to put in, the accounts. You're always going to debit cash, always going to credit bonds payable, and then you've got your premium or discount. And this is the unclean number. This is a clean number, right?

There's always going to be a clean number. This is the number that you multiply by the percent that the interest rate is going to use. Now, what do we do for our straight line method of amortization here? This is still a relatively simple one. That's okay.

As we're breaking into it, there's a lot to say. So assuming we use the straight line method, we are going to amortize $2,250 for each period. Now, this is the straight line method. Normally, what you will do is the effective method. And if any of you have seen this before, you're probably familiar, you're not going to do the same amount each year.

You're going to

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