UNIVERSITY OF CALOOCAN CITY

Bachelor of Science in Accountancy

Bonds Payable and Effective Interest Method

Initial Measurement:

 PFRS 9 par.5, if not designated at FVPL, Fair Value minus transaction costs. Same as the issue
price or the net proceeds from the issue of the bonds, excluding the interest.
- FV- present value of future cash payments to settle the bonds liability.
- Transaction costs- bond issue costs.

Subsequent Measurement:

A. At amortized cost using the effective interest method

B. At fair value through profit or loss.

Accounting for issuance of bonds

1. Memorandum Approach
2. Journal Entry Approach

Bonds can be issued at

a. Face amount
b. At a premium
c. At a discount

Financial Statement Presentation:

- Generally, Non-Current Liability. If portion of it is payable next year then current liability.

Fair value option of measuring bonds payable

- Irrevocably designated as at FVPL.

- Re-measured every year-end at fair value and recognized on profit or loss.
- No more amortization. Transaction cost is expense immediately.
- Interest expense is recognized using stated rate.
Multiple Choice Questions:

1. On March 1, 2018, an entity issued 5,000 of P1,000 face value bonds at 110 plus accrued
interest. The entity paid bond issue cost of P400,000. The bonds were dated November 1, 2017,
mature on November 1, 2027, and bear interest at 12% payable semi-annually on May 1 and
November 1. What net amount was received from the bond issuance?
a. 5,500,000 c. 5,300,000
b. 5,700,000 d. 5,100,000

2. During the current year, an entity issued 5,000,000 9% face value bonds at 110 at interest date.
In connection with the issue of the bonds, the entity paid the following costs:
Promotion cost 100,000
Engraving Cost 200,000
Underwriter Commission 400,000
Legal Fees 350,000
Fees paid to accountants for registration 50,000
What amount should be recorded initially as discount or premium on bonds payable?
a. 500,000 premium c. 600,000 premium
b. 500,000 discounts d. 600,000 discount

3. On January 1, 2018, an entity issued 9% bonds in the face amount of P5,000,000 which mature
on January 1, 2028. The bonds were issued for P 4,695,000 to yield 10%. Interest is payable
annually on December 31. The entity used the interest method of amortizing bond discount.
I. What is the interest expense for 2018?
a. 469,500 c. 450,000
b. 500,000 d. 422,500

II. What is the carrying amount of the bonds payable on December 31, 2018?
a. 4,695,000 c. 4,714,500
b. 4,704,000 d. 5,000,000

4. On January 1, 2018, an entity issued 10-year bonds with face amount of P5,000,000 for
P5,775,000. The entity paid bond issue cost P100,000 on same date. The stated interest rate on
the bonds is 10% payable annually every December 31. The bonds have an 8% yield per annum
after considering the bond issue cost. The entity used the effective interest method of
amortizing the bond premium.
I. What is the interest expense for 2019?
a. 454,000 c. 500,000
b. 458,960 d. 450,320

II. What is the carrying amount of the bonds payable on December 31, 2019?
a. 5,695,960
 b. 5,579,320
c. 5,629,000
d. 5,737,000

5. On January 1, 2017, Trisha Company received P1,0772,200 for 12% bonds with face amount of
P1,000,000. The bonds were sold to yield 10%. Interest is payable semi-annually every January 1
and July 1. The entity elected the fair value option for measuring financial liabilities.
On December 31, 2017, the fair value off the bonds is P1,064,600. The change in fair value of the
bonds is attributed to market factors.
I. What is the carrying amount of the bonds payable on January 1, 2017?
a. 1,000,000
b. 1,077,200
c. 500,000
d. 583,600
II. What is the interest expense for 2017?
a. 120,000
b. 100,000
c. 107,720
d. 129,264
III. What is the gain or loss from change in fair value of the bonds payable for 2017?
a. 64,600 gain
b. 64,600 loss
c. 12,600 gain
d. 12,600 loss
IV. What is the carrying amount of the bonds payable on December 31, 2017?
a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920

Theory:

1. Bonds payable not designated at fair value through profit or loss shall be measured initially at
a. Fair value
b. Fair value plus bond issuance cost
c. Fair value less issuance cost
d. Face amount

2. After initial recognition, bonds payable shall be measured at

a. Amortized cost using the effective interest method.
 b. Fair value through profit or loss
c. Amortized cost using the effective interest method and fair value through other
comprehensive income
d. Amortized cost using the effective interest method and fair value through profit or loss.

3. The amortized cost of bonds payable means

a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus discount on bonds payable and minus
bonds issue costs.

4. Which is a true statement for electing the fair value option for measuring bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.

5. How would the amortization of premium on bonds payable affect the carrying amount of bond
and net income respectively?
a. Increase and decrease
b. Increase and increase
c. Decrease and decrease
d. Decrease and increase

6. How would the amortization of discount on bonds payable affect the carrying amount of bond
and net income respectively?
a. Increase and decrease
b. Increase and increase
c. Decrease and decrease
d. Decrease and increase

7. Unamortized debt discount should be reported as

a. Direct deduction from the face amount of the debt.
b. Direct deduction from the present value of the debt
c. Deferred charge
d. Part of the bond issue cost

8. An entity neglected to amortize the premium on outstanding bond payable. What is the effect of
the failure to record premium amortization on interest expense and bond carrying amount,
respectively?
a. Understated and understated
 b. Understated and overstated
c. Overstated and understated
d. Overstated and overstated.

9. What is the interest rate written on the face amount of the bonds?
a. Coupon rate
b. Nominal rate
c. Stated rate
d. Coupon rate, nominal rate or stated rate

10. What is the rate of interest actually incurred?

a. Market rate
b. Yield rate
c. Effective rate
d. Market, yield or effective rate.