In this lesson, we're going to start with

a very simple example of a bond so that you get to see the basic principles and then

gradually we will be adding more complexity with additional features like

a discount or a premium or conversion feature or having it issued between dates.

Well, we'll build upon this simple structure that we start

with right now just to give you the basics of bond accounting.

Again, this is ignoring a lot of other costs and complicating factors,

but it's a good place to start.

So, let's take an example.

January 1st, 2017, Padre Pizza issues $10 million of bonds at 6 percent.

So, 10 million is the face amount or the par value of the bonds.

Six percent is the stated interest rate.

Since there's no discount or premium,

that's also the effective interest rate.

The interest rate will be payable semiannually.

That's twice a year on June 30th and December 31st for 10 million.

Notice we had issued on January 1st,

2017 to make the math easier.

In my experience, not a lot of bonds are actually issued

on January 1st for some reason, it's a holiday.

But again, you'll see this a lot in accounting problems.

So, what is the interests that will be paid semiannually.

So, how much is the semiannual interest?

While the interests that will be due on

June 30th and December 31st is going to be my stated interest rate of six percent,

we can adjust it for the fact that it's only half a year.

Here, I'm using the 360 day convention,

I've got a 180 divided by 360.

You could also just divide it by two.

But it's six percent or six percent times one-half a year,

times the carrying amount,

which in this case is equal to the par value of 10 million,

and I would have $300,000 of interest payable every six months.

Here's what we'll do with those amounts we just calculated.

Now, an issuance we're going to record the receipt of

cash and the issuance of bonds, bonds payable,

no discount, no premium, no initial costs,

strictly at par, $10 million.

So, remember this program was structured to be simple, it's not realistic.

But sometimes, this is what you'll see in accounting problems.

So, what will the interest payments look like?

Let's do it under two scenarios,

one in which you're preparing interim statements

and one and which are not preparing interim financial statements.

Let's start with the no interim financial statements first.

On June 30th, I will debit my interest expense for 300,000 and credit cash.

There's my interest. Well, what if we're issuing interim financial statements,

that means at March 31st,

I'm going to have accrued interest.

Well, that's going to look like this, March 31st,

I'll debit interest expense for half of the amount.

Why? Because it's three months of the six months.

Of a 150,000 and the interest payable for a 150,000,

and then June 30th when I get to the second quarter,

I'll have interest expense for that quarter of an interest

payable from the previous quarter and pay the cash of 300,000 out.