INTERMEDIATE ACCOUNTING 2 MODULE

Chapter 5:  SALE OF BONDS

BONDS PAYABLE When an entity sells a bond issue, it undertakes to pay the face
amount of the bond issue on maturity date and the periodic
Objectives: interest.
The learner should be able:
 To understand the nature and purpose of a bond. Interest is usually payable semi-annually or every six months.
 To identify the types of bond. There are certain bonds that pay interest annually or at the end
 To know the measurement of bonds payable. of every bond year.
 To understand the concept of bond premium and bond
discount.  MEASUREMENT OF BONDS PAYABLE
 To describe the methods of amortizing bond premium and  Initial measurement
discount. Bonds payable not designated at FV through profit or loss
 To apply the fair value option of measuring bonds payable.
shall be measured initially at fair value minus transaction
costs that are directly attributable to the issue of the bonds
payable.
Start of Discussion
Bond issue costs shall be deducted from the fair value or
 BOND DEFINITION issue price of the bonds payable in measuring initially the
A bond is a contract of debt whereby one party called the issuer bonds payable.
borrows funds from another party called the investor.
If bonds are designated and accounted for at “fair value
A bond is evidenced by a certificate and the contractual through profit and loss”, the bond issue costs are treated as
agreement between the issuer and investor is contained in a expense immediately.
document known as “bond indenture”.
 Subsequent Measurement
 TYPES OF BONDS a. At amortized cost using the effective interest method
 Term bonds b. At fair value through profit or loss
 Serial bonds
 Mortgage bonds Amortized cost is the amount at which the bond liability is
 Collateral trust bonds measured initially minus principal repayment, plus or minus the
 Debenture bonds cumulative amortization using the effective interest method of
 Registered bonds any difference between the face amount and present value of
 Coupon or bearer bonds the bonds payable.
 Convertible bonds
 Callable bonds Discount or Premium is the difference between the face amount
 Guaranteed bonds and the present value of the bonds payable.
 Junk bonds
 Zero-coupon bonds  ACCOUNTING FOR ISSUANCE OF BONDS
a. Memorandum Approach
 FEATURES OF BOND ISSUE b. Journal Entry Approach
a. A bond indenture or deed of trust is the document which
shows in detail the terms of the loan and the rights and
duties of the borrower and other parties to the contract. -End of Discussion-
b. Bond certificates are used.
c. If property is pledged as security for the loan, a trustee is
named to hold title to the property serving as security. SELF-CHECK TEST:
d. A bank or trust entity is usually appointed as registrar or Supersonic Company was authorized to issue 12%, 10-year bond
disbursing agent. with face amount of P7,000,000 on April 1, 2020. Interest on the
bonds is payable semi-annually on April 1 and October 1 of each
year.
 CONTENTS OF BOND INDENTURE
The bond indenture is the contract between the bondholders and
The bonds were sold to underwriters on April 1,2020 at 106. The
the borrower or issuing entity. entity amortizes discount or premium only at the end of the fiscal
a. Characteristics of the bonds year, using the straight line method.
b. Maturity date and provision for repayment
c. Period of grace allowed to issuing entity Required:
d. Deposit to cover interest payments 1. Prepare journal entries for 2020 and 2021 including
e. Required debt to equity ratio adjustments at the end of each year. Use memorandum
approach.
INTERMEDIATE ACCOUNTING 2 MODULE
2. Present bonds payable in the statement of financial position
on December 31, 2020.