Summary :

BONDS is a contract between the issuer and the investor

Pay specified sum of money at a determinable future date:
The different terms of bonds.
Measurement
Bond not designated of FVPL shall be measured initially at FV minus transaction cost that are
directly attributable to the issue of the bonds payable.

Bond shall be deducted from the fair value or issue price of the bonds payable in measuring
initially the bonds payable.
However if the bonds are designated and accounted for if FV PL “ bond issue costs are treated
as expense immediately.

PFRS 9 provides that after initial recognition ,bonds payable shall be measured either

Amortized cost using effective interest method.

At FVPL .

EFFECTIVE INTEREST METHOD

Nominal rate or stated rate appearing on the face of the bonds

Effective rate – actual interest incurred on the bond issue
The rate that exactly discounts estimated cash future payments through the expected life of the
bonds payable or when approximate, a shorter period to the net carrying amount of the bonds
payable.
The effective rate is also known as yield or market rate.

If the bonds are sold at face amount, the nominal rate and effective rate the same.
If the bonds are sold at a discount the effective is higher than nominal rate.
If the bonds are sold at a premium the effective is lower than nominal rate.

Effective interest method of amortizing discount and premium on bonds payable.

Effective interest method or simply interest method or scientific method recognizes two kinds of
interest rate nominal rate and effective rate.

The annual amortization of premium or discount is the difference between effective interest
expense and nominal interest expense.

How will you compute:

The interest expense is computed by multiplying the CA of the bonds payable at the beginning
of the year by the effective rate.

The nominal interest expense is computed by multiplying the Face Amount of the bonds
payable by the nominal rate.

The effective interest method provides for an increasing of discount amortization and increasing
amount of interest expense.
The effective interest method provides for an increasing amount premium amortization but a
decreasing amount of interest expense.