>> Another excellent summary, Paul.
Good job.
So a quicker way to remember this is any noncash items have to
be taken out in the indirect method for SCF.
And then any gains or loses related to investing activities or
financing activities have to be taken out, as well.
And it's nice to have a simple rule like that,
because I'm going to keep adding to the list.
So I also have an example of accounting for a premium bond.
But to be honest with you, very few bonds are ever issued at a premium.
The vast, vast, vast majority of bonds are either at a discount or at par.
I don't know, there's probably some investor psychology reason behind this.
So this is not something that's really important for the real world.
I'm going to go through it quickly for
completeness to get another review of the mechanics.
If you want to go through it more slowly,
then I guess just watch it again at half speed.
So KP issues the same bond.
Three year, 5% coupon, $10,000 face value.
But now the market rate is 4%, so the market rate has dropped below the coupon.
Which means investors are willing to pay a premium.
Proceeds are above face value.
[SOUND] You could figure that out through present value calculations.
So if you in all the perimeters, what's really changed here is
the interest rate is now 2% instead of 3% in the discount example.
[SOUND] You would end up with a present value of 10,280.
And I noticed I missed the n equals 6.
So go ahead and write that in, but, but not on your computer screen.
But maybe on the printout for the slides.
[SOUND] Anyway, the journal entry on issuance would be debit cash,
10.280 and credit bonds payable 10,280.
[SOUND] This is what the amortization schedule is going to look like.
First thing to notice is the interest expense is always less than the cash paid,
that's because the effective rate of 4% is below the coupon rate of 5%.
Of course, the coupon rate, coupon payment is the same every period.
And so we're have is our plug to bonds payable is always going to be a debit,
it's always going to reduce bonds payable.
So over the life of the bond, bonds payable balance gets reduced from
1080 down to 10,000, which is what we owe at maturity.
So to do a interest expense entry, you would debit interest expense for
206, taking the June 30, 2010.
Credit cash for 250 and then a plug as a debit to the bonds payable.
[SOUND] And then at maturity, again debit interest expense, credit cash and
then debit bonds payable for the 10,000 plus the last debit for
the interest payment of 49.
So, it's almost the mere image of the discount.
In fact, you could hold the video up to a mirror.
And you would see that the premium is the mirror image [LAUGH] of the discount.
So let's move on to the next topic.