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I. What is a bond?

a. Formal, unconditional promise, made under seal, to pay a specified sum of money
at a determinable future date, and to make periodic interest payments at a stated
rate until the principal sum is paid
b. A contract of debt whereby the borrower (issuer of the debt) borrows funds from
the investor (bond holder)
c. Evidenced by a bond certificate: the agreement is contained in another document
known as bond indenture
i. Characteristics of the bond
ii. Maturity date and provision for repayment
iii. Others (p. 166 of Valix)
d. Used primarily by corporations and government units
II. Types of bonds
a. Term and serial bonds
i. Term: single date of maturity
1. May require the issuing entity to establish a sinking fund to
provide money at retirement
ii. Serial: series of maturity dates: payed thru installments!
b. Secured and unsecured
i. Mortgage bonds: bonds secured by a mortgage on real properties (explain
US housing bubble)
ii. Collateral trust bonds: bonds secured by stocks and bonds of other
iii. Debenture bonds: bonds without collateral security
c. Registered and bearer
i. Register: requires the registration of the name of the bondholders on the
books of the corporation (important to know who to pay the interest to)
ii. Coupon/bearer bonds (unregistered bonds): residual definition
d. Other types
i. Convertible bonds: can be exchanged for shares of the issuing entity
ii. Callable bonds: may be called in for redemption prior to the maturity date
iii. Guaranteed bonds: issued whereby another party promised to make
payment if the borrower fails to do so
iv. Junk bonds: high-risk, high-yield bonds issued by entities that are heavily
indebted or otherwise in weak financial condition
III. Sale of bonds payable
a. Note that one bond certificate is usually in a small denomination (i.e. if the entire
utang is 1M, the bonds are divided into smaller denominations like 100, 1000,
10,000, etc.). The amount on the certificate is the face value of the bond
b. i.e. 50M face value bonds are old, and are solid in 1,000 peso denominations,
there will be 50,000 bond certificates issued
c. usually the sale of bonds is undertaken by an underwriter or investment bank (or
any financial institution): they work on a commission basis
d. when an entity issues bonds, it promises to pay the face value + interest at the
maturity date
IV. Initial measurement of bonds payable
a. PFRS 9.5: BP not designated at FVTPL
i. @ FV directly attributable transaction costs (part of the discount)
ii. FV = PV of the future cash payments to settle the liab
b. Bond issue costs: deduct from the FV/issue price of BP in measuring initially the
bonds payable (part of the discount)
i. If bonds are FVTPL: expense immediately
c. FV of bonds = issue price or net proceeds from the bonds, excluding interest
V. Subsequent measurement of bonds payable
a. PFRS 9.5
i. Amortized cost using the effective interest method
1. Amount at which the bond is measured initially principal
repayment +/- cumulative amort using the effective interest method
of any difference between initial amount and the maturity amount
a. The difference can either be a discount or a premium on the
issue of the bonds payable
ii. At FVTPL
VI. Accounting for issuance of bonds
a. Memo approach: no entry is made upon the authorization of the entity to issue
bonds. Authorized bonds payable account is not maintained
b. Journal entry approach: reverse of memo approach
c. Example: An entity is authorized on 1/1/13 to issue 5M, 10 year, 12% face value
bonds, interest payable Jan1 and july 1. 1 share cert is = 1,000 face value. The
bonds are sold at face value
i. Memo: dr. cash cr. BP
ii. Journal entry
1. Dr unissued bonds payable cr. Authorized bonds payable
2. Dr. cash cr. Unissued BP
VII. Issuance of BP at a premium
a. 5M face value sold at 105 (do entries!)
b. premium is in effect a gain (but not reported as an outright gain) because you get
more than what you are required to pay (which is the face value)
c. when you have premium: nominal rate > effective rate
i. nominal rate: rate appearing on the face of the bond cert
ii. effective rate: rate in the market today
d. so if nominal rate is bigger, the bond holder will get an above average return. And
he is willing to pay higher for the bond = premium
e. amortize premium over useful life of the bonds
i. dr. premium cr. Interest expense (bawas sa costs so increase sa profit)
f. Premium is + to BP (treat as valuation account)
VIII. issuance of BP at a discount
a. 5M face sold at 95
b. discount is in effect a loss (inc. in expenses) but dont treat it as an outright loss
c. discount: effective rate > nominal rate
i. you are getting less that what you should be getting based on market
standards so you pay less to acquire the bonds
d. amortize over useful life
i. dr. int exp cr. Discount
e. discount is to BP (treat as a valuation account)
IX. recording interest on bonds (example: 5M 12 % march 1 and sept 1)
a. payment of interest during the year
i. dr. int. exp cr. cash
b. accrual of interest at the end of the year
i. dr. int. exp cr. Accrued interest payable
X. Bond issue costs
a. Incremental costs: directly attributable
i. Printing, engraving, legal, accounting, registration, commissions
b. Treat as discount
i. Amortize! Dr. int exp cr. BIC
c. Example: p. 176
XI. Issuance of bonds between interest dates
a. Look at iPad: p. 178-180
b. Assume you bought the bonds at an interest date!
c. There is accrued interest!!
i. Paid by the investor! (notice tumaas cash mo)
XII. Bond retirement on maturity date
a. To make a bond issue more attractive: establish a sinking fund (set aside funds
i. CA or NCA: it follows the liab!
b. No accounting problem
i. Dr. bonds payable dr. int exp. Cr. Cash or sinking fund
XIII. Bond retirement prior to maturity date
a. They can be canceled or permanently retired, or be reissued again
b. Canceled (procedures)
i. Update amort of disc and prem
ii. Accrue interest at date of cancellation
iii. Determine CA of bonds (+ unamortized prem unamortized disc)
iv. Compute for G/L on retirement
1. Diff bet retirement price vs CA
v. Make the entries
c. Look at iPad: p. 183-186
XIV. How to amortize premium and discount of BP
a. Straight-line: based on the life of the bond
b. Effective interest method
i. Nominal/coupon/stated rate
ii. Effective/yield/market rate: rate that exactly discounts estimated cash
future payments through the expected life of the bonds payable or when
appropriate, a shorter period to the net carrying amount of the BP
c. When bonds sold at face: effective = nominal
d. Premium: effective < nominal
e. Discount: effective > nominal
XV. Effective interest method
a. Effective interest expense = effective rate x CA of bonds
i. CA changes every year when you amortize prem or disc
b. Compare effective int exp with nominal: different is prem or disc amort
i. Prem: nominal effective
ii. Disc: effective nominal
c. Example: p. 219 (disc)
d. Example: p. 220 (prem)