INTERMEDIATE ACCOUNTING 2 the prevailing market rate of

interest.
- WHEN bonds are sold at face
BONDS PAYABLE value the entry is:

Issuance of Bonds (refer on page 1 of Initial entry:

the illustration)
Cash XXX
- An entity shall recognize
Bonds Payable XXX
financial liability in its statement
of financial position when, the
entity becomes a party to the
- If effective rate or market is
contractual provisions of the
higher or greater than the
instrument
interest rate, contract rate or
- BONDS PAYABLE are initially
stated rate
recognized at the date of the
o ITS IS DISCOUNT
actual issue of the bonds.
- Bond liabilities are initially Sale of bonds at a discount price is
recognized at the net proceeds recorded as:
from their issuance. The issue
price of the bond is the market
`price of the bond, which varies Cash(selling price) XXX
with safety of the investment and
the prevailing market rate for Discount on bonds Payable XXX
similar instruments. Bonds Payable XXX

- Contract rate, stated rate

nominal interest rate. Discount on bonds is reported as
o the rate of interest stated a direct deduction from face value of the
on the face value of the bonds.
bond.

- If effective rate or market rate

- Market rate, yield or effective
interest rate
o The interest rate which
investors are willing to
accept on bond at the time
of its issue.
- The sale of bond at face value
implies agreement between the
bond stated rate of interest and
is lower or less than the
interest rate, contract rate or
stated rate.
o ITS IS A PREMIUM
Sale of bonds at a premium price is
recorded as:
Cash(Selling price) XXX
Bonds payable XXX
Premium on bonds XXX
Premium on bonds is an adjunct
account and reported as an addition to
the face value of the bonds.
- Bond Quotation (refer on page
3 of the illustration)
Bond prices are quoted as a percentage
of face value. Mostly (100%) basis
If the percentage is more than 100% an
example is 105% it is considered the
bond trading is a PREMIUM.
On the other hand, if the basis is less
than 100% an example is 95% the bond
trading is a DISCOUNT.
- If the bond quotation are not
available the market price can
be determined by discounting
the maturity value of the bond
and all interest payments at the
market rate of interest for similar
debt on that date. Using
amortization table to be exact.
Accrued interest on bond issued.
(refer on page 2 of illustration)
- Bonds are often issued at any
date between the interest
payment dates. Since the
issuing corporation will pay the
full interest on all bonds
outstanding at an interest date,
the bond holder is usually
required to purchase the interest
that has accrued from the most
previous interest date to the date
of sale.
- The accrued interest is added
to the issue price of the bond
to determine the total cash
proceeds from the bond
issuance.
Note: Mostly to accrue an interest
we can determine if there is a
date given in the Bond issued.
Example:
If we encounter like this
statement.
Bond issue dated on Jan. 1, 2023
and sold on March 1, 2023. In this
problem we need to accrue the
date from Jan 1, 2023 up to Feb.
28, 2023. And that will be added
as an interest payable.
For the formula: if it is semi
annual
We can use the
FV*half of the rate of
nominal*accrued month/6months
1000000*7.5%*2/6
Then if it is annual we can use
the
FV*nominal rate*accrued
month/12
1000000*15%*2/12
Transaction cost on issue of
Bonds (Refer to page 6 for the
initial entry of Bond issue cost)
- Bond issue cost are
expenditure incurred by
issuing company for legal
fees, printing and engraving of
bond certificates, taxes,
commissions and similar
charges.
- When a financial liability is
recognized initially, an entity
shall measure it at its fair value
(issue price) and considering
transactions cost that are directly
attributable to the issue costs
from part of the initial carrying
amount of the bond liability.
- In effect the net proceeds are
reduced by incurrence of bond
issue cost. The determination of
the initial amount of the premium
or discount on bonds payable is
based on the difference between
the face value and the net
proceeds.
For the entry of the Issue cost
DC on bonds payable XXX
Cash XXX
Or
Premium on bonds payable XXX
Cash XXX
Note: always on debit side either
dc or premium.
Normal balance of DC is Debit so
it will be a addition to compute
the total DC.
The normal balance of premium
is Credit, it will be a deduction to
compute the total premium.
Effective interest method
- Bonds are financial liabilities that
are subsequent measured it at
AMORTIZED COST.
- The amortized cost of a financial
liability is the amount of which it
is measured at initial recognition
minus the principal repayments
plus or minus the cumulative
amortization using the effective
interest method.
Note: Effective interest should be
renew if there a bond issue cost
to equally tie the carrying
amount.
When Bond year does not
coincide with reporting period.
(refer to page 6)
- If the bond does not coincide
with the reporting period other
than the entries every interest
payment date an ADJUSTING
ENTRY IS MADE AT YEAR
END TO ACCRUE INTEREST
AND UPDATE THE
AMORTIZATION OF PREMIUM
OR DISCOUNT.
 - After the adjusting entry at year
end, at the beginning of the
subsequent year, reverse the
adjusted entry.
Retirement of bonds(refer to page 7)
- Issuing corporation may retire
bonds at maturity date or before
the maturity date either
redeeming the bonds or
repurchasing then in the open
market.
-