BONDS PAYABLE

Bond – is a formal unconditional promise, made under seal, to pay a specified sum of money at a
determinable future date, and to make periodic interest payment at a stated rate until the principal
sum is paid.
 Contract of debt

2 parties:
1. Issuer/ Seller – issued bond in exchange of cash (liability- bonds payable)
2. Investor/Purchaser – paid cash in exchange of bond (asset-investment in bonds)

INITIAL MEASUREMENT:
1. FV option – option of the issuer to designate the bonds at FV through P/L
IM = FV of the bonds
 Cash price equivalent
 Quoted price – ex.: quoted at 105
 Present value
o How to compute PV?
o PRINCIPAL – know if it is either term (PV of 1) or serial bond (PV of
ordinary annuity if first payment is at the end of 1 period or PV of annuity
due if the first payment is at Day1)
o INTEREST – PV of ordinary annuity of 1
- Transaction costs are treated as expense
2. No FV option – no designation at FV through P/L
IM = FV – Transaction costs / “bond issue costs”
 Transaction costs are amortized together with the premium or discount
Interest rates
1. Nominal rate – coupon/stated/agreed rate
- basis of interest payment (INTEREST PAID)
2. Effective rate – yield rate/market rate of interest/real rate
- basis of interest expense
NR > ER - PREMIUM (PV is higher than face value)
NR < ER - DISCOUNT (PV is lower than face value)

Determine the issue price of the bonds on Jan. 1, 2020 – initial measurement
CASE 1:
Face amount of the bonds P 5,000,000
Date of issue of bonds Jan. 1, 2020
Nominal rate 8%
Effective rate 6%
Semiannual interest June 30 and Dec 31
Date of maturity Jan. 1, 2022
PV of 1 at 3% for 6 periods 0.8885
PV of ordinary annuity of 1 at 3% for 6 periods 3.7171

Principal 5,000,000 x 0.8885 = 4,442,500

Int. paid (8% x 5,000,000 x 1/2) 200,000 x 3.7171 = 743,420
5,185,920
Alternative:
Get the difference between NR and ER
4% - 3% = 1% x 5,000,000 = 50,000 x 3.7171 = 185,855
5,000,000
5,185,855

CASE 2:
 Face amount of the bonds P 5,000,000
Date of issue of bonds Jan. 1, 2020
Nominal rate 6%
Effective rate 8%
Semiannual interest June 30 and Dec 31
Date of maturity Jan. 1, 2022
PV of 1 0.6756
PV of ordinary annuity of 1 8.1109

Principal 5,000,000 x 0.6756 = 3,378,000

Interest (5,000,000 x 6% x ½) 150,000 x 8.1109 = 1,216,635
4,594,635

CASE 3: Serial bond

Face amount P6,000,000
Annual installment every Dec. 31 2,000,000
Date of issue Jan. 1, 2020
NR payable annually every Dec. 31 12%
Effective interest rate 14%

Principal Interest Total PV factor Present

Payment value
Dec. 31, 2,000,000 720,000 (6,000,000 2,720,000 0.8772 2,385,984
2020 x 12%)
Dec. 31, 2,000,000 480,000(4,000,000 x 2,480,000 0.7695 1,908,360
2021 12%)
Dec. 31, 2,000,000 240,000(2M x 12%) 2,240,000 0.6750 1,512,000
2022
INITIAL MEASUREMENT
5,806,344
Initial measurement is not equal to proceeds
o Happened when date of issuance is not the same with date of sale
o Jan 1- date of issuance, Dec. 31- balance sheet date, April 1- date of sale (accrued
interest)
o Initial measurement = fair value
o Proceeds = fair value + accrued interest (3 mos)

Amortization
o Method on computing amortized cost (subsequent measurement if it is not FV option)
o Effective interest method (interest paid is not equal to interest expense)
o Int paid = Face value x Nominal rate
o Int exp = Carrying amount, beg x Effective rate
o At maturity date, Face amount = Carrying amount
o Discount / premium amortization – diff. between int. paid and int. exp.
o Amortized cost = Carrying amount, beg. +/- Discount/Premium amortization
o 4,800,000 + 200,000 = 5,000,000 (Discount)
o 5,200,000 – 200,000 = 5,000,000 (premium)

CASE 4:
Face amount of the bonds P3,000,000
Date of issue of bonds Jan. 1, 2020
Date of sale of bonds Apr. 1, 2020
Nominal rate 6%
Effective rate 8%
Semiannual interest Jan. 1 and Jul. 1
Date of maturity Jan. 1, 2025

PV, 1/1/20
Principal 3,0000,000 x 0.6756 = 2,026,800
Interest 90,000 x 8.1109 = 729,981
 2,756,781
PV, 4/1/20 (accrued interest)
Int. paid = 3,000,000 x 3% x 3/6 = 45,000 (3,000,000 x 6% x 3/12)
Int. exp. = 2,756,781 x 4% x 3/6 = 55,136
Discount amort. 10,136

Initial measurement Proceeds

Carrying amount 2,756,781 FV 2,766,917
+Disc. Amort. 10,136 Accrued int. 45,000
2,766,917 2,811,917

Subsequent measurement
1. Not designated at FV through P/L (no FV option)
- Amortized cost = CA, beg. + Disc. Amort.
= CA, beg. – Prem. Amort.
2. Designated at FV through P/L (FV option)
- Fair value (no discount or premium)
- Int. paid and int. exp. Will be the same (Face amount x Nominal rate)
- any changes in FV will be part of P/L
- increase in FV (unrealized loss) – liability
- decrease in FV (unrealized gain) -

Illustrative Problem.
On Jan. 1, 2021, Red Velvet Co. received P1,077,200 for P1,000,000 face amount 12% bonds.
The bonds were sold to yield 10%. Interest is payable semiannually every Jan. 1 and Jul. 1.
The entity has elected the fair value option for measuring the financial liability.
On Dec. 31, 2021, the fair value of the bonds is determined to be P1,064,600 due to market and
interest factors.
Required:
1. What is the carrying amount of the bonds payable on Jan. 1?
a. 1,000,000 c. 500,000
b. 1,077,200 d. 538,600
2. What is the interest expense for 2021? (1,000,000 x 12%)
a. 120,000 c. 107,720
b. 100,000 d. 129,264
3. What is the gain/loss from change in fair value of the bonds for 2021? (1,077,200 - 1,064,600)
a. 64,600 gain c. 12,600 gain
b. 64,600 loss d. 12,600 loss
4. What is the carrying amount of the bonds payable on Dec. 31, 2021?
a. 1,064,600 c. 1,000,000
b. 1,077,200 d. 1,064,920

Pikachu Corp. issued P10,000,000 of 10% bonds on Jan. 1, 2026. The prevailing market rate of
interest for similar type of securities was 12% on the date of issue. The bonds will mature on
Dec. 31, 2028. Interests are being paid annually every Dec. 31.
REQUIRED:1
1. Compute the total proceeds from bond issuance
2. Prepare an amortization table
3. Assuming the bonds are retired at maturity date, prepare the necessary journal entry.
4. Assuming the bonds are retired on Oct. 1, 2027, prepare the necessary journal entry.
Retirement price is @ 99

1. Principal 10,000,000 x 0.71178 = 7,117,800

Interest (10,000,000 x 10%) 1,000,000 x 2.40183 = 2,401,830
PV, 1/1/2026 9,519,630
2.
Date Int. paid Int. exp Amortization Carrying amount
1/1/2026 9,519,630
12/31/2026 or 1,000,000 1,142,356 142,356 9,661,986
1/1/2027
12/31/2027 1,000,000 1,159,438 159,438 9,821,424
12/31/2028 1,000,000 1,178,571 178,571 10,000,000

CA, End = CA, beg. X 1.ER – Int. paid

= 9,519,630 x 1.12 – 1,000,000
= 9,661,986
3. Retirement of bonds – payment of bonds
Retirement at maturity at 12/31/2028
Face value = Carrying amount
No more premium or discount at maturity
Bonds payable10,000,000
Cash 10,000,000

4. Before maturity
Face value not equal to carrying amount
Carrying amount(as of date of maturity) vs. Retirement price
Difference is gain or loss
Gain if CA > RP
Loss if CA < RP

Bonds payable (face amount) xx

Premium on BP xx
Loss on retirement xx
Discount on BP xx
Gain on retirement xx
 Cash (retirement price) xx

Carrying amount, 12/31/2026 9,661,986

Disc. Amort. (1/1/2027 to 10/01/2027)
Int. paid (10M x 10% x 9/12) 750,000
Int. exp. (9,661,986 x 12% x 9/12) 869,579 119,579
Carrying amount, 10/01/2027 9,781,565

Retirement price = 10,000,000 x 99%

= 9,900,000

9,781,565 vs. 9,900,000

118,435 loss

Unamortized discount as of 10/01/2027

10,000,000 – 9,781,565 = 218,435

Bonds payable 10,000,000

Loss on retirement 118,435
Discount on BP 218,435
Cash 9,900,000