ACC 124

JOVIT G. CAIN
 Introduction
• PFRS 9, requires bond discounts and bond premium
shall be amortized using effective Interest Method.
• Two kinds of Interest Rate
✓ Nominal Rate- also known as coupon rate or
stated rate appearing on the face of the bond.
✓ Effective Rate- also known as yield rate or
market rate. This is the actual rate which the
bondholder earns during the bond investment.
This is also the rate that discounts future cash
payment through the expected life of bond.
 Effective Nominal Effective
Rate Rate Rate Vs.
Bond is at
Premium.
Lower Higher
Nominal
The rate is Rate
Bond is at Higher Lower
discount,
the rate is
 Effective Nominal Effective
Rate Rate Rate Vs.
Bond is at
Premium.
Lower Higher
Nominal
The rate is Rate
Bond is at Higher Lower
discount,
the rate is
 Schedule of amortization
Date Interest Interest Discount Carrying
received Income Amortization amount
Effective Interest Jan. 1, 2019 964,540
Method- Discount
June 30, 2019 40,000 48,227 8,227 972,767

On January 1, 2019, an Dec. 31, 2019 40,000 48,638 8,638 981,405

investor acquired P1,000,000
face amount bonds dated June 30, 2020 40,000 49,070 9,070 990,475
January 1, 2019. The bonds
mature on December 31, Dec. 31, 2020 40,000 49,525 9,525 1,000,000
2020. The life of the bonds is 2
years, and 8% interest is
payable semiannually on
June 30 and December 31.
The cost of the bonds is
P964,540, a price which yield
a 10% effective rate per year.
 Schedule of amortization
Date Interest Interest Discount Carrying
received Income Amortization amount
Effective Interest Jan. 1, 2019 964,540
Method- Discount
June 30, 2019 40,000 48,227 8,227 972,767

On January 1, 2019, an Dec. 31, 2019 40,000 48,638 8,638 981,405

investor acquired P1,000,000
face amount bonds dated June 30, 2020 40,000 49,070 9,070 990,475
January 1, 2019. The bonds
mature on December 31, Dec. 31, 2020 40,000 49,525 9,525 1,000,000
2020. The life of the bonds is 2
years, and 8% interest is
payable semiannually on
June 30 and December 31.
The cost of the bonds is
P964,540, a price which yield
a 10% effective rate per year.
 Schedule of amortization
Date Interest Interest Discount Carrying
received Income Amortization amount
Effective Interest Jan. 1, 2019 964,540
Method- Discount
June 30, 2019 40,000 48,227 8,227 972,767

On January 1, 2019, an Dec. 31, 2019 40,000 48,638 8,638 981,405

investor acquired P1,000,000
face amount bonds dated June 30, 2020 40,000 49,070 9,070 990,475
January 1, 2019. The bonds Face Amount x Nominal Rate Carrying Amt x Effective Rate
mature on December 31, Dec. 31, 2020
= 1,000,000 Interest Inc.
40,000
x 4% – Interest
Preceding
= 964,540 x 5%
49,525 CA+Received
Discount
9,525Amortization
1,000,000
2020. The life of the bonds is 2 = 48,227 – 40,000+ 8,227
= 964,540
years, and 8% interest is
payable semiannually on
June 30 and December 31.
The cost of the bonds is
P964,540, a price which yield
10% / 2 (semiannual) = 5%
8% / 2 (semiannual) = 4%
a 10% effective rate per year.
 Schedule of amortization
Date Interest Interest Discount Carrying
received Income Amortization amount
Effective Interest Jan. 1, 2019 964,540
Method- Discount
June 30, 2019 40,000 48,227 8,227 972,767

On January 1, 2019, an Dec. 31, 2019 40,000 48,638 8,638 981,405

investor acquired P1,000,000
face amount bonds dated June 30, 2020 40,000 49,070 9,070 990,475
January 1, 2019. The bonds
mature on December 31, Dec. 31, 2020 40,000 49,525 9,525 1,000,000
2020. The life of the bonds is 2Face Amount x Nominal Rate Carrying Amt x Effective Rate
years, and 8% interest is Interest Inc. – Interest
Preceding Received
CA+ Discount Amortization
= 1,000,000 x 4% = 972,767 x 5%
payable semiannually on = 48,638 – 40,000+ 8,638
= 972,767
June 30 and December 31.
The cost of the bonds is
P964,540, a price which yield
a 10% effective rate per year.
 Schedule of amortization
Date Interest Interest Discount Carrying
received Income Amortization amount
Effective Interest Jan. 1, 2019 964,540
Method- Discount
June 30, 2019 40,000 48,227 8,227 972,767

On January 1, 2019, an Dec. 31, 2019 40,000 48,638 8,638 981,405

investor acquired P1,000,000
face amount bonds dated June 30, 2020 40,000 49,070 9,070 990,475
January 1, 2019. The bonds
mature on December 31, Dec. 31, 2020 40,000 49,525 9,525 1,000,000
2020. The life of the bonds is 2
years, and 8% interest is
payable semiannually onFace Amount x Nominal Rate Carrying Amt x Effective Rate
June 30 and December 31. Interest Inc. – Preceding
= CA+ Discount Amortization
981,405
Interest Received x 5%
The cost of the bonds is
= 1,000,000 x 4% = 40,000
981,405 + 9,070
= 49,070 –
P964,540, a price which yield
a 10% effective rate per year.
 Schedule of amortization
Date Interest Interest Discount Carrying
received Income Amortization amount
Effective Interest Jan. 1, 2019 964,540
Method- Discount
June 30, 2019 40,000 48,227 8,227 972,767

On January 1, 2019, an Dec. 31, 2019 40,000 48,638 8,638 981,405

investor acquired P1,000,000
face amount bonds dated June 30, 2020 40,000 49,070 9,070 990,475
January 1, 2019. The bonds
mature on December 31, Dec. 31, 2020 40,000 49,525 9,525 1,000,000
2020. The life of the bonds is 2
years, and 8% interest is
payable semiannually on
June 30 and DecemberFace 31. Amount x Nominal Rate Workback
Balancing Figure
The cost of the bonds= is1,000,000 x 4% =The
= 1,000,000 40,000
– 990,475 + 9,525
face amount of 1,000,000
P964,540, a price which yield
a 10% effective rate per year.
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
 Effective
Interest
Method-
Discount
(cont.)

Note that the amortization is

done on every interest date
rather than at the end of the
reporting period.
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
Effective
Interest
Method-
Discount
(cont.)
 Schedule of amortization

Date Interest Interest Premium Carrying

Effective Interest received Income Amortization amount

Method- Premium Jan. 1, 2019 1,049,740

Dec. 31, 2019 120,000 104,974 15,026 1,034,714

On January 1, 2019, an
Dec. 31, 2020 120,000 103,471 16,529 1,018,185
investor acquired P1,000,000
face amount bonds dated
January 1, 2019. The bonds Dec. 31, 2021 120,000 101,815 18,185 1,000,000
mature on December 31,
2021. The life of the bonds is 3
years and bear 12% interest
payable annually every
December 31. The cost of the
bonds is P1,049,740, a price
which yield a 10% effective
rate per year.
 Schedule of amortization

Date Interest Interest Premium Carrying

Effective Interest received Income Amortization amount

Method- Premium Jan. 1, 2019 1,049,740

Dec. 31, 2019 120,000 104,974 15,026 1,034,714

On January 1, 2019, an
Dec. 31, 2020 120,000 103,471 16,529 1,018,185
investor acquired P1,000,000
face amount bonds dated
January 1, 2019. The bonds Dec. 31, 2021 120,000 101,815 18,185 1,000,000
Carrying Amt x Effective Rate
mature on December 31, Face Amount x Nominal Rate
2021. The life of the bonds is 3
= 1,049,740 x 10%
Interest Received – Interest
Preceding CA-Income
Premium Amortization
= 1,000,000 x 12%
= 120,000 – 104,974 - 15,026
years and bear 12% interest = 1,049,740
payable annually every
December 31. The cost of the
bonds is P1,049,740, a price
which yield a 10% effective
rate per year.
 Schedule of amortization

Date Interest Interest Premium Carrying

Effective Interest received Income Amortization amount

Method- Premium Jan. 1, 2019 1,049,740

Dec. 31, 2019 120,000 104,974 15,026 1,034,714

On January 1, 2019, an
Dec. 31, 2020 120,000 103,471 16,529 1,018,185
investor acquired P1,000,000
face amount bonds dated
January 1, 2019. The bonds Dec. 31, 2021 120,000 101,815 18,185 1,000,000
mature on December 31,
2021. The life of the bonds is 3
years and bear 12% interest Face Amount x Nominal Rate Carrying Amt x Effective Rate
– Interest
Preceding CA- Premium
IncomeAmortization
payable annually every = 1,000,000 x 12%Interest Received
= 1,034,714 x 10%
December 31. The cost of the = 120,000 – 103,471
= 1,034,714 - 16,529
bonds is P1,049,740, a price
which yield a 10% effective
rate per year.
 Schedule of amortization

Date Interest Interest Premium Carrying

Effective Interest received Income Amortization amount

Method- Premium Jan. 1, 2019 1,049,740

Dec. 31, 2019 120,000 104,974 15,026 1,034,714

On January 1, 2019, an
Dec. 31, 2020 120,000 103,471 16,529 1,018,185
investor acquired P1,000,000
face amount bonds dated
January 1, 2019. The bonds Dec. 31, 2021 120,000 101,815 18,185 1,000,000
mature on December 31,
2021. The life of the bonds is 3
years and bear 12% interest
Workback
Balancing Figure
payable annually every
Face Amount x Nominal Rate
= 1,018,185 – 1,000,000
= 120,000 - 18,185
December 31. The cost of the
bonds is P1,049,740, a price
= 1,000,000 x 12% The face amount of 1,000,000
which yield a 10% effective
rate per year.
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Premium
(Cont.)
Effective
Interest
Method-
Serial
Bonds
Effective
Interest
Method-
Serial
Bonds
 Effective
Interest
Method-
Serial
Bonds

Face Amount x Nominal Rate Carrying Amt x Effective Rate Interest Received – Interest Income
Annual– installment
= 4,000,000 x 10% = 4,171,810 x 8% Preceding CA – Principal333,745
= 400,000 Payment- Premium Amortization
= 4,171,810 – 1,000,000 - 66,255
 Effective
Interest
Method-
Serial
Bonds

Carrying Amt x Effective Rate

Face Amount x Nominal Rate Interest Received – Interest Income
= 3,105,555 x 8% Annual installment
– 248,444
Preceding CA – Principal Payment- Premium Amortization
= 300,000
= 3,000,000 x 10% = 3,105,555 – 1,000,000 - 51,556
 Effective
Interest
Method-
Serial
Bonds

Face Amount x Nominal Rate Carrying Amt x Effective Rate Preceding CA – Principal
Interest Received – Interest
Payment-
IncomePremium Amortization
Annual installment
= 2,000,000 x 10% = 2,053,999 x 8% == 2,053,999
200,000 – –164,320
1,000,000 - 35,680
 Effective
Interest
Method-
Serial
Bonds

Face Amount x Nominal Rate Workback Balancing Figure

= 1,000,000 x 10% = 100,000 – 18,319
LastAnnual installment
payment of principal
= 1,018,319 – 1,000,000
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Effective
Interest
Method-
Serial Bonds
(Cont.)
Market
price of
the bonds
Market
price of
serial
bonds
 Market
price of
serial
bonds

Face Amount x Nominal Rate

= 6,000,000 x 12%
 Market
price of
serial
bonds

Face Amount x Nominal Rate

= 4,000,000 x 12%
 Market
price of
serial
bonds

Face Amount x Nominal Rate

= 2,000,000 x 12%
-end of presentation-
Thank you
References
• Edmonds, T., Edmonds, C. McNair, F. & Olds, P. (2016). Fundamental
financial accounting concepts. (9th ed.). Boston, Mass : McGraw – Hill
Education

• Fraser, L. M. & Ormiston, A. (2016).Understanding financial statements.

(11th ed.). England: Pearson Education Limited.

• Valix, C., Peralta, J. F., &Valix, C. A. M. (2017). Financial accounting- first

part. (2017 ed., Vol. 1). Manila, Philippines: GIC enterprises & Co., Inc.