Intermediate Accounting 2

Chapter 5 Bonds Payable

ISSUANCE OF BONDS PAYABLE
 Bonds - A bond is a formal unconditional promise, (Interest Date)
made under seal, to pay a specified sum of money at a ISSUE ISSUANCE INTEREST AMORT OF DISC
determinable future date, and to make periodic DATE ENTRY ENTRY OR PREM
interest payment at a stated rate until the principal ON Cash Int Exp (Disc or Prem
amount is paid. Interest Discount Cash /terms= Annual
Date Premium Amort x _ /12)
TYPES OF BONDS
BP Int Exp
 Terms Bonds – single date of maturity
Int Pay
 Serial Bonds – series of maturity dates
 Mortgage Bonds – secured on real properties BETWEEN Cash Int Exp Original Life of
 Collateral Trust Bonds – secured by shares and bonds Interest Discount Cash bonds (years x
of other corporations Date 12)
 Debenture Bonds – unsecured bonds Premium Int Exp
 Registered Bonds – require the registration of the BP Int Pay Less: Expired
name of the bondholders on the books of the corp. Int Exp Life
 Coupon or Bearer Bonds – unregistered bonds On the date of
 Convertible Bonds – can be exchanged for shares sale (Jan 1 to
date of sale)
 Callable Bonds – may be called in for redemption prior
maturity date
= Remaining
 Guaranteed Bonds – another party promises to pay if Mos.
the borrower failed to do so.
 Junk Bonds – high risk, high yield issued by entities Monthly amort
that are heavily indebted (disc or prem/
 Zero-coupon Bonds – no interest but the bond offer a remaining mos.)
return of a deep discount (huge discount)
Amort from
MEASUREMENT OF BONDS PAYABLE date of sale to
Bonds Initial Transaction Subsequent end of the year
Payable Cost (monthly amort
Not FVPL Fair Value Reduction Amortized X no. of mos.)
to Fair Value Cost
FVPL Fair Value Expensed Fair Value
immediately (For BETWEEN)
Issue Price
Gain / Loss Add: Accrued Interest from Jan 1 to Date of Issuance
Credit Risk OCI RETAINED EARNINGS TOTAL CASH RECEIVED

Not Credit Risk P/L *Usually, accrued interest is paid by the buyer or investor

ISSUANCE OF BONDS PAYABLE BONDS ISSUE COST

(Discount or Premium)
 Bond Issue Cost – transactions directly attributable to
ISSUE PRICE ISSUED AT EIR vs NR INT EXP vs
the issue of bonds payable. Must be lumped with the
INT PAID
discount on bonds payable or netted against
= Face Value Face Value EIR = NR IE = IP
premium on bonds payable.
< Face Value Discount EIR > NR IE > IP
> Face Value Premium EIR < NR IE < IP
 ISSUED AT JOURNAL ENTRY
FACE VALUE Bonds Issue Cost/ 5. Determine Gain / Loss
Discount on BP Bonds Payable
Cash Add/Less: Discount
< FACE VALUE Discount on BP Carrying Amount
Cash Less: Retirement Price
>FACE VALUE Premium on BP GAIN OR LOSS ON RETIREMENT
Cash
6. Record the Retirement:
FINANCIAL STATEMENT PRESENTATION
Bonds Payable
ISSUED AT PRESENTATION Interest Expense
= FACE VALUE Bonds Payable Premium
( at Face Value) Loss
< FACE VALUE Bonds Payable Cash
Less: Unamortized Disc Discount
Carrying Amount Gain
>FACE VALUE Bonds Payable
Add: Unamortized Prem QUERY – not all bonds are retired
Carrying Amount
1. Entry to Update Amortization of Discount &
BOND PAYABLE RETIREMENT Premium Computation:
Disc or Prem /terms= Annual Amort x (January 1
ON MATURITY DATE to date of retirement) _ / 12 = Interest Exp
Entry:
Bond Payable 2. Compute for Unamortized Balance of Discount or
Interest Expense Premium:
Cash/ Sinking Fund Discount or Premium
Less: Amortization from issuance to retirement
 Sinking Fund – can be used to pay the bondholders (no. of months/ total months * discount or
premium) = BALANCE
PRIOR MATURITY DATE
1. Entry to Update Amortization of Discount &
Premium Computation: 3. Determine the accrued interest:
Disc or Prem /terms= Annual Amort x (January 1 Retired face amount * rate * (Jan 1 to date of
to date of retirement) _ / 12 = Interest Exp retirement) _/12 = ACCRUED INTEREST

2. Compute for Unamortized Balance of Discount or 4. Determine total cash payment:

Premium: Retirement price (retired face amount *
Discount or Premium retirement rate)
Less: Amortization from issuance to retirement Add: Accrued Interest
(no. of months/ total months * discount or TOTAL CASH PAYMENT
premium) = BALANCE
5. Determine Gain / Loss
3. Determine the accrued interest: Bonds Payable retired
Face amount * rate * (Jan 1 to date of Add/Less: Discount/ Prem (face amount
retirement) _/12 = ACCRUED INTEREST retired/bond payable * balance of disc/prem)
CARRYING AMOUNT
4. Determine total cash payment: Less: Retirement Price
Retirement price (face amount * retirement) GAIN OR LOSS ON RETIREMENT
Add: Accrued Interest
TOTAL CASH PAYMENT
 7. Record the Retirement:  Straight Line method
- Equal amortization
Bonds Payable (face amount of retired)
Interest Expense  Bond Outstanding method
Premium - Serial bonds only
Loss
Cash Year Bond Fraction Premium /
Discount Outstanding Discount
Gain

8. Record the remaining bonds

(only record the accrued interest starting from
the date of retirement to end of year because the
accrued is already updated in the retirement
entry)

TREASURY BONDS

 Treasury Bonds – entity’s own bonds originally issued

and reacquired but not cancelled.
 Should be debited at face amount
 Related unamortized discount or premium
should be cancelled
 Accrued interest is charged to interest expense
 Difference of acquisition cost and carrying
amount is gain or loss on acquisition
Computation:
ACQUISITION
Face amount of Treasury Bonds
Add/ Less: Applicable Premium/Discount
(Acquired/Original*Unamortized)
CARRYING AMOUNT
Less: Reacquisition Price (Acquired*Price)
GAIN/LOSS

Reacquisition price
Add: Accrued interest on the bonds
TOTAL CASH PAYMENT

BOND REFUNDING

 Bond Refunding – floating of new bonds the proceeds

from which are used in paying the original bonds
- Premature retirement of old bonds
- Bond refinancing

AMORTIZATION OF PREMIUMS AND DISCOUNTS

Intermediate Accounting 2 Dat Principal Interest TOTAL PV PV
Chapter 6 Effective Interest Method e Paymen Paymen factor
t t
 Effective Interest Method – known as the scientific Annual A+B per yr
payment
method or interest method.
 Nominal rate – coupon or stated rate
TOTAL PV
 Effective rate – yield or market rate
Less: Face Amount
PREMIUM / DISCOUNT
ISSUED AT EIR vs NR
Face Value EIR = NR Date Int Paid Int Amort Princ CA
Exp Pay
Discount EIR > NR
From CA x Int Annual CA -
Premium EIR < NR interest EIR Paid – Payment amort
payment Int exp
above
Premium Amortization Computation
Nominal interest (Face x NR)
Less: Effective Interest (CA x EIR)
PREMIUM AMORTIZATION

Discount Amortization Computation

Effective Interest (CA x EIR)
Less: Nominal interest (Face x NR)
DISCOUNT AMORTIZATION

SCHEDULE OF AMORTIZATION

Date Int Paid Int Exp Amort CA

NOTE: If payment is done semiannually, divide the

nominal and effective rate into 2.

MARKET PRICE OR ISSUE PRICE

Market Price/ Issue Price/ Total PV =

PV of bond liability + PV of future interest payment

PV of Bonds Payable = FV x PV of 1

PV of future interest payments =

(Face x Nominal Rate) * PV of OA of 1 using EIR

SERIAL BONDS

Present value Computation:

Interest Payment: (sample amounts)

1st Year (3M * Nominal Rate)
2nd Year (2M * Nominal Rate)
3rd Year (1M * Nominal Rate)
A B (a) (b) (a x b)
Intermediate Accounting 2 Computation:
Chapter 7 Compound Financial Interest
WITH MARKET VALUE WITHOUT MARKET VALUE
 Financial Instrument- gives rise to both financial asset PV= FACE AMOUNT PV of principal (face x
and financial liability factor)
+
CHARACTERISTICS PV of interest payments
 Contract ( (NR x Face) x factor) = PV
 2 parties Issue Price (Face x bond Issue Price (Face x bond
 Gives rise financial asset and liability price) price)
- -
EXAMPLES Market value (face x mv) Present Value
 Cash in the form of notes and coins = RESIDUAL AMOUNT = RESIDUAL AMOUNT
 Cash in the form of checks EXERCISE: EXERCISE:
 Cash in bank Cash (no. of shares x price Cash (no. of shares x price
 Trade accounts per share) per share)
 Notes and loans
 Debt securities Share warrants Share warrants
 Equity Securities outstanding (% x residual outstanding (% x residual
amount) amount)
FINANCIAL LIABILITY
 Financial Liability - contractual obligation to deliver Share capital (no. of shares Share capital (no. of
cash or other financial asset and to exchange financial x par) shares x par)
instruments
Share premium/ discount Share premium/ discount
CHARACTERISTICS (remaining) (remaining)
 Trade accounts payable EXPIRATION: EXPIRATION:
Share warrants Share warrants
 Notes Payable
outstanding (remaining % x outstanding (remaining %
 Loans payable
residual amount) x residual amount)
 Bonds payable
Share premium/discount- Share premium/discount-
NONFINANCIAL LIABILITY
unexercised warrants unexercised warrants
 Deferred revenue & warranty obligations
 Income tax payable
 Constructive obligation
b) Convertible Bonds
EQUITY INSTRUMENT
ORIGINAL ISSUANCE
 Equity Instrument- any contract that evidences a
WITH MARKET VALUE WITHOUT MARKET VALUE
residual interest in the asset after deducting all the
PV= FACE AMOUNT PV of principal (face x
liabilities; include ordinary share capital, preference
factor)
share and warrants or option.
+
PV of interest payments
COMPOUND FINANCIAL INSTRUMENT
( (NR x Face) x factor) = PV
 Compound financial instrument- contains both a
Issue Price (Face x bond Issue Price (Face x bond
liability and equity element
price) price)
- -
a) Bonds Payable Issue with Share Warrants
Issue price of bonds (face Present Value
i. Detachable – can be traded separately
x selling price)
ii. Non Detachable- cannot be traded separately
= RESIDUAL AMOUNT = RESIDUAL AMOUNT
CONVERSION EXTINGUISHMENT = CA OF BP
- No gain or loss at maturity CA of BP –
- Cost incurred is deducted to share issue cost FV w/o conversion privilege
(face x w/o conversion price
ON THE SAME DATE = GAIN/LOSS ON
TOTAL Bond Payable + EXTINGUISHMENT
CONSIDERATION Premium + JOURNAL ENTRY BP
Share premium (conversion) Premium on BP
= TOTAL CONSIDERATION Share premium – conversion
SHARE Total Consideration – Cash
PREMIUM/DISCOUN Par Value of share capital Gain on Extinguishment
T (ISSUANCE) issued
(no. of shares x par) Interest Expense
= SHARE Cash
PREMIUM/DISCOUNT
(ISSUANCE) TO CLOSE:
JOURNAL ENTRY BP Share Premium (conversion)
Premium Share premium (issuance)
Share Premium (conversion)
Interest Expense
Share Capital
Share premium (issuance)
Cash

At MATURITY
SHARE PREMIUM- Original issue price -
CONVERSION Issue price of bonds
= SHARE PREMIUM
(CONVERSION)

PREMIUM/DISCOUN Issue price of bonds –

T ON BP (ISSUANCE) Face amount
= PREMIUM/DISCOUNT ON
BP (ISSUANCE)
JOURNAL ENTRY BP
Interest Expense
Cash

TO CLOSE:
Share Premium (conversion)
Share premium (issuance)

BEFORE MATURITY
FV OF EQUITY FV w/ conversion privilege
COMPONENT (face x w/ conversion price) -
FV w/o conversion privilege
(face x w/o conversion price
= FV OF EQUITY
COMPONENT

GAIN/LOSS ON BP – Premium on BP