Bonds Payable

Files FA203 Bonds Payable.pdf Notes 03 Bonds Payable.pdf

Unit/Module Bonds Payable

Week Week 5

Bonds payable
a contract of debt between two parties, the debtor (borrower) and investor (lender)

long term liability and incur periodic interest

Bonds vs. Notes vs. Loans

Notes payable arise with a promissory note and nagkakaroon ng notes payable kapag bumili ka
ng goods, services or PPE kay seller of goods or services

Loans payables there is also a promissory note pero nangutang ka ng cash sa mga lending
institutions

Bonds payable umutang ka ng cash sa isang general investing public in a way of bond indenture
and bond certificate, and mayroong underwriter

Classification of Bonds
As to Principal payment

One time (lump sum) → Term bonds

Series of Payment (installment) → Serial bonds

As to Security

Bonds payable with collateral Secured Bonds)

Secured by a real property → Mortgage bonds payable

Secured by investment → Collateral trust bonds payable

Secured by movable property → Chattel mortgage bonds payable

Bonds without collateral → unsecured bonds (a.k.a debenture)

Bonds Payable 1
 As to Holder

The Bondholder is registered in the company's book and known to the company → Registered
bonds

The Bondholder is not registered in the company's book and unknown to the company →
Bearer bonds (may naka-attach na coupons for interest payment at kung sino ang may hawak
nung bonds siya babayaran)

Other Classifications
Convertible bonds: bonds payable kung saan instead na babayaran ka ng cash may option yung
invester na i-convert na lang ng shares or stock ng company

Callable bonds: gives the issuer the right to pay the principal in advance (ahead of maturity
date)

Guaranteed bonds: gives the holder the right to collect from a guarantor if the issuing company
failed to pay

Junk bonds: issued by a company with low credit standing but issued at a high interest rate

Illustration Bonds payable classification - Term vs. Serial):

 IT Corporation December 31, 2019 balance sheet contained the following items in the long-term
liabilities section:

9.25% registered debentures, callable in 11 years, due in 16 years

700,000
9.25% collateral trust bonds, convertible into common stock
600,000
beginning in 2008, due in 19 years

10% subordinated debentures P30,000 maturing annually beginning in 2020

300,000 Serial bonds)

What is the total amount of IT's term bonds?

Solution:
9.25% registered debentures, callable in 11 years, due in 16 years
700,000
9.25% collateral trust bonds, convertible into common stock
600,000

Bonds Payable 2
 Total amount of IT's term bonds 1,300,000

Secured Vs. Unsecured

2. IT Corporation December 31, 2019 balance sheet contained the following items in the long-term
liabilities section:

10% registered bonds, callable in 2019, due in 2023, secured by machinery

3,000,000
11% bonds, convertible into common stock beginning in 2018, due in 2025, secured by realty
5,000,000
12% collateral trust bonds P50,000 maturing annually)
7,000,000

What are the total amounts of IT's secured bonds?

Solution:

10% registered bonds, callable in 2019, due in 2023, secured by machinery

3,000,000
11% bonds, convertible into common stock beginning in 2018, due in 2025, secured by realty
5,000,000
12% collateral trust bonds P50,000 maturing annually)
7,000,000
Total amount of IT's secured bonds
15,000,000

Issuance stage
Initial Measurement of Bonds Payable

Method 1

Fair value (issue price) xx

Less: Transaction cost (xx)

Initial measurement xx

Bonds Payable 3
 Issue price (including interest) xx

Interest receivable sold (xx).

Fair value of bonds xx

Exactly on interest dates:

Issue price = Fair value of bonds

If issued in between interest dates

Issued price will be split between FV of bonds and Interest receivable sold

How to compute for the interest receivable that you sold to the investor:
Principal amount xx

Times: Nominal interest rate x%

Times: Months interest sold x/12 Interest date to date of issuance)
Interest Receivable sold xx

Illustration:
On May 1, 2019, Raiders Company issued P2,000,000, 10 years, 9% bonds at 105 including accrued
interest. These bonds are dated January 1, 2019. Interest is payable semi-annually on January 1 and
July 1. Transaction costs of P10,000 were paid by Raiders.

What is the carrying amount of bonds payable on May 1, 2019? 2,030,000

Solution:
Principal amount 2,000,000

Bonds Payable 4
 Times: Nominal Interest rate 9%
Times: Months interest sold 4/12 Jan.1 - May. 1

Interest Receivable sold 60,000

Method 1

Fair Value 2,040,000

Less: Transaction cost 10,000
Initial Measure 2,030,000

Issue price 2.1 M 2M x 105% = allocate between FV bonds and Interest receivable sold

Issue Price (including interest) 2,100,000

Interest receivable sold 60,000
FV of bonds 2,040,000

Transaction cost: are the payment for services related to issuance of bonds such as:

Commission fee

Underwriter's fee

Agent fee

Legal fee

Accounting fee

Method 2
Amount x PV factor = PV amount
Principal xx x xx = xx
Nominal int. xx x xx = xx

PV of cashflow xx

Principal Amount)
Term bond = Whole principal

Serial bond = Principal per installment

Bonds Payable 5
 Principal Present Value Factor)

Original Effective rate or yield rate

Term bond = PV of 1

Serial bond = PV of annuity

Nominal Interest per period Amount):

Face amount x Nominal interest rate

Nominal Interest per period PV Factor):

Term bond = PV of annuity

Serial bond = PV of 1

If Interest is payable semi annually,

Effective rate is divided by 2

Number of periods is times 2

Illustration FV of Term bonds, Annual interest)

3. Ava company issued a 10-year bonds payable with face amount of P4,000,000 on January 1,
2023. The interest is payable annually on December 31 at the 6% stated interest rate. The bonds
were issued to yield 9%.
The present value of 1 at 6% for 10 periods is 0.56 and the present value of an ordinary annuity
of 1 at 6% for 10 periods is 7.36.
The present value of 1 at 9% for 10 periods is 0.42 and the present value of an ordinary annuity
of 1 ar 9% for 10 periods is 6.42.

What is the market price of the bonds on January 1, 2023?

Solution:

Amount x PV factor = PV amount

Principal 4,000,000 x 0.42 = 1,680,000 Nominal interest computed as:

Nominal int. 240,000 x 6.42. = 1,540,800 Face amount

PV of cashflow 3,220,800 4,000,000

Bonds Payable 6
 Times: Nominal interest rate
6%
Nominal interest
240,000

Initial Measurement - FV of Term Bonds, Semi Annual Interest

4. Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1,
2022. The bonds pay interest semi-annually on June 30 and December 31. The bonds are issued to
yield 5%.

What are the proceeds form the bond issue?

Solution:
Effective rate = 5% / 2 = 0.025 (since it is semi-annually)

Periods = 5 x 2 = 10

Amount x PV factor = PV amount

Principal 5,000,000 x Nominal interest computed as:

0.781 = 3,905,000
Face amount 5,000,000
Nominal int. 150,000 x
Times: Nominal interest rate 6%
8.752 = 1,312,800
Times: Semi annual 6/12
PV of cashflow
5,217,800 Nominal interest 150,000

Initial Measurement - FV of Serial Bonds, Annual interest

5. Kim Chui Company issued bonds with face amount of P6,000,000 on January 1, 2021. The
nominal rate of 6% is payable annually on December 31. The bonds are issued with an 8% effective
yield. The bonds mature on every December 31 each year at the rate of P2,000,000 for the three
years.

Bonds Payable 7
 Present value of 1 at 8%

One period 0.9259

Two periods 0.8573

Three periods 0.7938

2.5771
Determine the market price or issue price of the bonds:

Solution:

Amount x PV factor = PV amount Interest 2021 6,000,000 x

6% = 360,000
Principal 2,000,000 x 2.5771 = 5,154,200
Nominal int. 360,000 x 0.9259 = 333,324 Interest 2022 4,000,000 x
6% = 240,000
Nominal int. 240,000 x 0.8573 = 205,752
Interest 2023 2,000,000 x
Nominal int. 120,000 x 0.7938 = 95,256.
6% = 120,000
PV of cashflow 5,788,532

Bonds Payable 8