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

Generally, bonds payable is a long term, liability and incur periodic interest.

Notes Payable – Seller of goods or services

Loans Payable – Loans from the bank

Bonds Payable – General investing public

I.

CLASSIFICCATION OF BONDS – AS TO PRINCIPAL PAYMENT

PRINCIPAL PAYMENT

 ONE TIME – TERM BONDS

 SERIES OF PAYMENT – SERIAL BONDS (INSTALLMENT)

CLASSICFICATION OF BONDS – AS TO SECURITY

BONDS PAYABLE WITH COLLATERAL (SECURED BONDS)

 SECURED BY REAL PROPERTY – MORTGAGE BONDS PAYABLE

 SECURED BY INVESTMENT – COLLATERAL BONDS PAYABLE
 SECURED BY PERSONAL INVESTMENT – CHATTEL MORTGAGE BONDS PAYABLE

BONDS PAYABLE WITHOUT COLLATERAL (UNSECURED BONDS; DEBENTURE)

CLASSICFICATION OF BONDS – AS TO HOLDER

REGISTERED BONDS – THE BOND HOLDER IS REGISTERED IN THE COMPANY’S BOOK AND KNOWN TO
THE COMPANY.

BEARER BONDS – THE BOND HOLDER IS NOT REGISTERED IN THE COMPANY’S BOOK AND UNKNOWN
TO THE COMPANY.

OTHER CLASSIFICATIONS

 CONVERTBLE BONDS – GIVES THE HOLDER THE RIGHT TO CONVERT THEIR RIGHT FROM
RECEIVING THE PRINCIPAL AND INTEREST INTO RECEIVING OWNERSHIP SHARE FROM THE
ISSUING COMPANY.
  CALLABLE BONDS – GIVES THE HOLDER 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 – BONDS ISSUED BY A COMPANY WITH LOW CREDIT STANDING BUT ISSUED AT A
HIGH INTEREST RATE.

TERM VS. SERIAL

1. 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 (TERM) 700,000

9.25% collateral trust bonds, convertible into common stock beginning in 2028, due in 19 years 600,000
(TERM)
10% subordinated debentures (P30,000 maturing annually beginning in 2020) (SERIAL) 300,000

What is the total

amount of IT’s term
bonds? A. 600,000
C. 700,000
B. 1,000,000 D. 1,300,000

SECURED VS. UNSECURED

1. IT Corporation December 31, 2018 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 (SECURED) (P50,000 maturing annually)

7,000,000

What are the total amounts

of IT’s secured bonds? A.
15,000,000

C. 12,000,000
B. 10,000,000 D. 8,000,000
II. INITIAL MEASUREMENT

METHOD 1:

FAIR VALUE OF BONDS XX (ISSUE PRICE / MARKET PRICE / CASH RECEIPT)

MINUS: TRANSACTION COST (XX)

INITIAL MEASUREMENT XX

TRANSACTION COST:

INVESTOR = ADD

DEBTOR = LESS

METHOD 2:

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL XX x XX = XX

NOMINAL INT. XX x XX = XX

PV OF CASHFLOW (IM) = XX

PV FACTOR:

PV OF 1 – ONE TIME PAYMENT

PV OF ORDINARY ANNUITY – SERIES OF PAYMENT, FIRST PAYMENT; AFTER ONE PERIOD

PV OF ANNUITY DUE – SERIES OF PAYMENT, FIRST PAYMENT; MADE IMMEDIATELY

PRINCIPAL: (ORIGINAL EFFECTIVE RATE)

TERM BOND – WHOLE PRINCIPAL

SERIAL BOND – PRINCIPAL PER INSTALLMENT

NOMINAL INTEREST PER PERIOD:

[FACE AMOUNT x NOMINAL INTEREST RATE]

TERM BOND = PV OF ANNUITY (FIXED)

SERIAL BOND = PV OF 1 (EACH INTEREST) (CHANGING)

NOTE:

ORIGINAL EFFECTIVE RATE

 ADJUSTED – PV OF CASHFLOW = INITIAL MEASUREMENT

 UNADJUSTED – PV OF CASHFLOW = FAIR VALUE (LESS: TRANSACTION COST)

IF INTEREST IS PAYABLE SEMI ANNUALLY, EFFECTIVE RATE IS DIVIDED BY 2; NUMBER OF PERIOD IS

TIMES 2

INITIAL MEASUREMENT – FV OF TERM BONDS, ANNUAL INTEREST

1. Ava Company issued 10-year bonds payable with face amount of P4,000,000 on January 1, 2023 (PV OF 1).
The interest is payable annually on December 31 at the 6% stated interest rate (NOMINAL RATE). The
bonds were issued to yield 9% (EFFECTIVE RATE).

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.

(NEVER USE NOMINAL RATE IN COMPUTING PV FACTOR)

The present value of 1 at 9% for 10 periods is 0.42 and the present value of an ordinary annuity of 1 at 9% for
10 periods is 6.42.

(EFFECTIVE RATE SHOULD BE USE IN COMPUTING PV FACTOR)

METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT

METHOD 2:

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL 4,000,000 x 0.42 = 1,680,000

NOMINAL INT. 240,000 x 6.42 = 1,540,800

PV OF CASHFLOW = 3,220,800

NOMINAL INTEREST COMPUTED AS:

FACE AMOUNT

4,000,000
TIMES: NOMINAL INTEREST RATE
 6%
NOMINAL INTEREST
240,000

What is the market price of the

bonds on January 1, 2023?
A. 1,680,000 C.
3,220,800
B. 3,991,200 D. 4,000,000

INITIAL MEASUREMENT – FV OF TERM BONDS, SEMI ANNUAL INTEREST

1. Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1, 2022. The
bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%.
(EFFECTIVE RATE: ADJUSTED)
(IF INTEREST IS PAYABLE SEMI ANNUALLY, EFFECTIVE RATE IS DIVIDED BY 2; NUMBER OF PERIOD
IS TIMES 2)
5% (YIELD) / 2 = 2.5; 5 (YEAR BONDS) x 2 = 10

Present value of 1 PV of annuity of Present value of PV of annuity of

Periods at 2.5% 1 at 2.5% 1 at 5% 1 at 5%
5 0.884 4.646 0.784 4.330
10 0.781 8.752 0.614 7.722

METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT

METHOD 2:

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL 5,000,000 x 0.781 = 3,905,000

NOMINAL INT. 150,000 x 8.752 = 1,312,800

PV OF CASHFLOW = 5,217,800 (INITIAL

MEASUREMENT)

NORMAL INTEREST COMPUTED AS:

FACE AMOUNT 5,000,000

TIMES: NOMINAL INTEREST RATE 6%

TIMES: SEMI ANNUAL 6/12

NOMINAL INTEREST 150,000

What are the

 proceeds from the
bond issue?
A. 6,531,618 C. 5,217,800
B. 5,216,494 D. 5,215,050

INITIAL MEASUREMENT – FV OF SERIAL BONDS, ANNUAL INTEREST

2. 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.
3 PERIODS
Present value of 1 at 8%:
One period 0.9259
Two periods 0.8573
Three periods 0.7938

METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT

METHOD 2:

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL 2,000,000 x 2.5771 = 5,154,200

NOMINAL INT. 360,000 x 0.9259 = 333,324

NOMINAL INT. 240,000 x 0.8573 = 205,752

NOMINAL INT. 120,000 x 0.7938 = 95,256

PV OF CASHFLOW (IM) = 5,788,352

SERIAL BOND – PRINCIPAL PER INSTALLMENT

INTEREST 2021 (6,000,000 x 6%) = 360,000

INTEREST 2022 (4,000,000 x 6%) = 240,000

INTEREST 2023 (2,000,000 x 6%) = 120,000

Determine the market price or

issue price of the bonds:
A. 5,788,532 C.
4,762,800
B. 5,690,555 D. 5,960,555
IF ISSUED IN BETWEEN INTEREST DATES

INTEREST RECEIVABLE SOLD COMPUTED AS:

PRINCIPAL AMOUNT XX

TIMES: NOMINAL INTEREST RATE X%

TIMES: MONTHS INTEREST SOLD X/12

INTEREST RECEIVABLE SOLD XX

INITIAL MEASUREMENT – BONDS SOLD WITH ACCRUED INTEREST

1. 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?
A. 2,090,000 C.
2,030,000
B. 2,150,000 D. 2,160,000

CASH PROCEEDS

FORMULA:
 FAIR VALUE OF BONDS XX

ADD: INTEREST RECEIVABLE SOLD XX

LESS: TRANSACTION COST (XX)

NET CAS RECEIPT XX

TOTAL CASH RECEIVED FROM ISSUANCE OF BONDS

1. On March 1, 2019, Madine Corporation issued at 103 plus accrued interest, 1,000 of its 15%, P1,000 bonds.
The bonds are dated January 1, 2019 and mature on January 1, 2024. Interest is payable semi-annually on
January 1 and July 1. Madine paid transaction costs of P60,000.

FAIR VALUE OF BONDS (1M x 103%) 1,030,000

ADD: INTEREST RECEIVABLE 25,000
LESS: TRANSACTION COST (60,000)
NET CASH RECEIPT 995,000

Based on the given information, how much would Madine realize as net cash receipts
from the bond issuance?
A. 995,000 C. 1,055,000
B. 1,030,000 D. 1,095,000
 AMORTIZATION TABLE
DATE EFFECTIVE INTEREST NOMINAL INTEREST AMORTIZATION
CARRYING AMMOUNT

XX/XX/XX -0- -0- -0-

XX

ISSUE DATE
INITIAL MEASURE
SUBSEQUENT MEASUREMENT – TERM BONDS, ANNUAL INTEREST
1. On January 1, 2016, Quilladin Company issued 5-year bonds with face value of P5,000,000 at 110. The
company paid bond issued cost of P80,000 on same date. The stated interest rate on the bonds is 8%
payable annually every December
31. After consideration of bond issue costs to be initially measured, the bonds were determined
to yield 6% per annum.

On December 31, 2016, what should Quilladin report as carrying amount

of the bonds payable? A. 5,430,800 C. 5,414,800
B. 5,345,200 D. 5,000,000

LONG CUT METHOD

DATE EFFECTIVE INTEREST NOMINAL INTEREST AMORTIZATION
CARRYING AMOUNT

01/01/16 -0- -0- -0-

5,420,000

12/31/16 325,200 400,000 74,800

5,345,200

INITIAL MEASUREMENT:

FAIR VALUE OF BONDS (5M x 110%) 5,500,000

LESS: TRANSACTION COST (80,000)

 INITIAL MEASUREMENT 5,420,000

EFFECTIVE INTEREST:

INITIAL MEASUREMENT 5,420,000

TIMES: EFFECTIVE RATE 6%

EFFECTIVE INTEREST 325,200

NOMINAL INTEREST:

PRINCIPAL 5,000,000

TIMES: NOMINAL RATE 8%

NOMINAL INTEREST 400,000

AMORTIZATION:

EFFECTIVE INTEREST 325,000

LESS: NOMINAL INTEREST (400,000)

AMORTIZATION 74,800

CARRYING AMOUNT, YEAR END:

CARRYING AMOUNT, PREVIOUS PERIOD 5,420,000

LESS: AMORTIZATION OF PREMIUM (74,800)

CARRYING AMOUNT, YEAR END 5,345,200

SHORT CUT METHOD

TERM BONDS

INITIAL MEASUREMENT 5,420,000

TIMES: 1 + EFFECTIVE INTEREST RATE 1.06%

LESS: NOMINAL INTEREST (400,000)

CARRYING AMOUNT, END 5,345,200

SERIAL BONDS

INITIAL MEASUREMENT XX

TIMES: 1 + EFFECTIVE INTEREST RATE X%

LESS: NOMINAL INTEREST (XX)

LESS: PRINCIPAL PAYMENT (XX)

CARRYING AMOUNT, END XX

SUBSEQUENT MEASUREMENT – TERM BONDS, SEMI ANNUAL INTEREST

1. On January 1, 2021, Classroom Company issued 10% bonds in the face amount of P5,000,000 that mature
on January 1, 2026. The bonds were issued for P4,580,000 to yield 12%, resulting in bond discount of
P420,000. Classroom Company used the interest method. Interest is payable semiannually on January 1,
and July 1.

What is the carrying amount of the bonds payable on

December 31, 2021?
A. 4,580,000 C. 4,631,088
B. 4,604,800 D. 5,000,000

TERM BONDS

INITIAL MEASUREMENT 4,580,000

TIMES: 1 + EFFECTIVE INTEREST RATE 1.06%

LESS: NOMINAL INTEREST (5M x 10% x 6/12) (250,000)

TIMES: 1 + EFFECTIVE INTEREST RATE 1.06%

LESS: NOMINAL INTEREST (5M x 10% x 6/12) (250,000)

CARRYING AMOUNT 12/31/21 4,631,088

SUBSEQUENT MEASUREMENT – SERIAL BONDS

1. On January 1, 2017, Bontoc Company issued 5,000,000, 8% serial bonds to be repaid in the amount of
P1,000,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10% a
year. The bond proceeds were P4,757,000 based on the present value at January 1, 2017 of five annual
payments. The entity amortized the bond discount by the interest method.

On December 31, 2017, what is the carrying amount

of the bonds payable? A. 3,832,700 C.
 4,805,600
B. 4,832,700 D. 3,805,600

SERIAL BONDS

INITIAL MEASUREMENT 4,757,000

TIMES: 1 + EFFECTIVE INTEREST RATE 1.10%

LESS: NOMINAL INTEREST (5M x 8%) (400,000)

LESS: PRINCIPAL PAYMENT (5M x 10%) (1,000,000)

CARRYING AMOUNT, END 3,832,700