CHAPTER 5: BONDS PAYABLE

CLASSIFICATION AND MEASUREMENT

INTEREST
INITIAL SUBSEQUENT FV
CLASSIFICATION AMORTIZED? EXPENSE
MEASUREMENT MEASUREMENT CHANGES
BASED ON
Yes Nominal
FVPL FV FV No (presented in
Financial Rate
profit or loss)
Liabilities
FV Effective
AC AC Yes No
- transaction cost Rate

*If FVPL, transaction or bond issue costs are expensed outright

*FV excludes accrued interest if the bonds are issued between interest dates

Issue Price (Net cash received) = FV + Transaction cost + Accrued Interest

**If AC and the Initial Measurement ≠ Face Value  the difference is…

IM > FA = Premium NR > ER = amortization is deducted to interest expense

IM < FA = Discount NR < ER = amortization is added to interest expense

DEFINITION OF BOND

- “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 whereby the issuer (borrower) borrows funds from the investor (holder)
- General public investing = public instrument na pwedeng magiba-iba ang investors or creditors
- Primarily used by corporations and government units
- Evidenced by a certificate called = “bond indenture” or “deed of trust”

TYPES OF BONDS

A. In terms of Maturity
a. Term Bonds – single date of maturity
b. Serial Bonds – series of maturity dates
c. Extendable Bonds – holder has the right to extend the initial maturity
d. Retractable Bonds – holder has the right to advance the principal in an earlier date

B. In term of Security
a. Mortgage Bonds – secured by mortgage on real property
b. Collateral Trust Bonds – secured by shares and bonds of another corporation
c. Debenture Bonds – unsecured bonds without collateral security

C. In terms of Registry and Bearer

a. Registered Bonds – requires the registration of the name of the bondholder on the books of the
corporation
**bawal itransfer from one holder to another w/o updating the name in the books

b. Coupon or Bearer Bonds – unregistered bonds

**interest payment has a detachable coupon
 D. Others
a. Convertible Bonds – can be exchanged for shares of the issuing entity
b. Callable Bonds – may be called in for redemption prior to the maturity date
c. Guaranteed Bonds – another party promises to make payment if the borrower fails to do so
d. Junk Bonds – high risk, high yield bonds issued by heavily indebted entities
e. Zero-Coupon Bonds – pay no interest but offer a return (deep discount)
f. Income Bonds – interest payments are subject to the earnings of the company
g. Participating Bonds

MEMORANDUN APPROACH

 Record the issuance of bonds

Cash XXX
Bonds Payable XXX

JOURNAL ENTRY APPROACH

 Record the authorization of bonds

Unissued Bonds Payable XXX

Authorized Bonds Payable XXX

 Record the issuance of bonds

Cash XXX
Unissued Bonds Payable XXX

ISSUANCE AT A PREMIUM

An entity issued bonds with face amount of P5,000,000 at 105. The journal entry to record this transaction is:

Cash 5,250,000
Bonds Payable 5,000,000
Premium on Bonds Payable 250,000

ISSURANCE AT A DISCOUNT

Assuming that the bonds are issued at a quoted price of 95. The journal entry would be:

Cash 4,750,000
Discount on Bonds Payable 250,000
Bonds Payable 5,000,000

In accounting for interest expense on bonds payable, dapat daw magrecognize ng dalawang item:

1. Payment of interest during the year

2. Accrual of interest at the end of the year
ISSUANCE OF BONDS AT INTEREST DATE

Illustration: On June 1, 2020, an entity sold bonds with the face amount of P5,000,000 at 97 and 12% interest payable
semiannually on June 1 and December 1. The bonds mature in 5 years. In as much as the bonds are sold on March 1,
2020, the first payment of interest will be on September 1, 2020.

Cash (5M x 0.97) 4,850,000

June 1 Discount on Bonds Payable 150,000
Bonds Payable 5,000,000
(Issuance of the bonds)

Interest Expense (P5M x 12% x 6/12) 300,000

Dec 1
Cash 300,000
(Payment of semi-annual interest)

Interest Expense (P5M x 12% x 1/12) 50,000

Dec 31
Accrued Interest Payable 50,000
(Accrual of Interest)

Interest Expense (P150,000/5 years = P30,000/year x 7/12) 17,500

Dec 31
Discount on Bonds Payable 17,500
(Amortization of Bonds Payable)

ISSUANCE OF BONDS BETWEEN INTEREST DATES

Illustration: On April 1, 2020, an entity issued bonds with face amount of P5,000,000 at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2020 and mature in 5 years and pay 12% interest semiannually on January 1
and July 1. To record the issue of the bonds on April 1, 2020:

Cash 5,378,000
April 1 Bonds Payable 5,000,000
Premium on Bonds Payable 228,000
Accrued Interest Payable (5,000,000 x 12% x 3/12) 150,000

Interest Expense (P5M x 12% x 6/12) 300,000

July 1
Cash 300,000

Premium on Bonds Payable 36,000

Interest Expense 36,000

(Straight line method)

Dec 31 5 years x 12 months = 60 months
 minus 3 months (Jan-Mar) = 57 months

228,000 / 57 = 4000
4000 X 9 months (Apr-Dec) = 36,000

FINANCIAL STATEMENT PRESENTATION

Noncurrent Liabilities:

Bonds Payable, due XX X XX XXX

Premium or (Discount) on Bonds Payable XXX
Carrying Amount XXX
BOND RETIREMENT ON MATURITY DATE

Bonds Payable XXX

Interest Expense XXX
Cash XXX

Bonds Payable XXX

Interest Expense XXX
Sinking Fund XXX
(If out of a sinking fund).

BOND RETIREMENT PRIOR TO MATURITY DATE

If Canceled or Permanently Acquired:

Illustration: On March 1, 2022, bonds with face amount of P5,000,000 are issued for P4,730,000. The bonds are dated
March 1, 2022 and mature in 5 years, and pay 12% interest semiannually on March 1 and September 1. All of the
bonds are retired on July 1, 2025 at 97.

 Step 1: Amortize the discount or premium up to the date of retirement

Annual Amortization = 270,000 / 5 years = 54,000

Amortization up to July 1, 2025 = 54,000 x 6/12 = 27,000

 Step 2: Determine the balance of the premium or discount on bonds payable

Discount on Bonds Payable 270,000

Less: Amortization from March 1, 2025 (180,000)

Total Months (5 years x 12) = 60

Amortized Months = 40
2022 = 10
2023 = 12
2024 = 12
2025 = 6

270,000 x 40/60 = 180,000

Balance of Discount on Bonds Payable, July 1, 2025 90,000

 Step 3: Determine the accrued interest up to the date of retirement

Yung na accrue lang na interest ay yung mula March 1 hanggang July 1… kaya 4 months lang:

Accrued Interest for 2025

5,000,000 x 12% x 4/12 = 200,000

 Step 4: Compute the total cash payment

Retirement Price (5,000,000 x 0.97) 4,850,000

Add: Accrued Interest 200,000
Balance of Discount on Bonds Payable, July 1, 2025 5,050,000
  Step 5: Determine the carrying amount of the bonds payable retired

Bonds Payable 5,000,000

Less: Discount on Bonds Payable (90,000)
Carrying Amount of Bonds Payable, July 1, 2025 4,910,000

 Step 6: Compute the Gain or Loss

Carrying Amount of Bonds Payable 4,910,000

Less: Retirement Price (4,850,000)
Gain on Early Retirement 60,000

If negative = Loss on Early Retirement

 Step 7: Record the retirement of bonds by canceling the bonds payable and unamortized premium or
discount. Accrued interests are debited to Interest Expense.

Bonds Payable 5,000,000

Interest Expense (Step 2) 200,000
Cash (Step 4) 5,050,000
Discount on Bonds Payable (Step 2) 90,000
Gain on Early Retirement of bonds (Step 6) 60,000

PARTIAL BOND RETIREMENT PRIOR TO MATURITY DATE

 Step 1: Amortize the discount or premium up to the date of retirement = 27,000

 Step 2: Determine the balance of the premium or discount on bonds payable = 18,000

(1,000,000 x 5,000,000 x 90,000)

 Step 3: Determine the accrued interest up to the date of retirement

Yung na accrue lang na interest ay yung mula March 1 hanggang July 1… kaya 4 months lang:

Accrued Interest for 2025

1,000,000 x 12% x 4/12 = 40,000
 Step 4: Compute the total cash payment

Retirement Price (1,000,000 x 0.97) 970,000

Add: Accrued Interest 40,000
Balance of Discount on Bonds Payable, July 1, 2025 1,010,000

 Step 5: Determine the carrying amount of the bonds payable retired

Bonds Payable 1,000,000

Less: Discount on Bonds Payable (18,000)
Carrying Amount of Bonds Payable, July 1, 2025 982,000

 Step 6: Compute the Gain or Loss

Carrying Amount of Bonds Payable 982,000

Less: Retirement Price 970,000
Gain on Early Retirement 12,000
  Step 7: Record the retirement of bonds by canceling the bonds payable and unamortized premium or
discount. Accrued interests are debited to Interest Expense.

Bonds Payable 1,000,000

Interest Expense (Step 2) 40,000
July 1 Cash (Step 4) 1,010,000
Discount on Bonds Payable (Step 2) 18,000
Gain on Early Retirement of bonds (Step 6) 12,000

Interest Expense (P4M x 12% x 6/12) 240,000

Sept 1
Cash 240,000

Interest Expense (P4M x 12% x 4/12) 160,000

Dec 31
Accrued Interest Payable 160,000

Interest Expense ([4M/5M x 54,000] x 6/12) 21,600

Dec 31
Discount on Bond Discount 21,600

TREASURY BONDS

- Originally issued and reacquired but not cancelled

Illustration: An entity originally issued bonds payable with face amount of P5,000,000 at 105 or a premium of P
250,000. Subsequently, the entity reacquired bonds with P1,000,000 face amount to be placed in the treasury at 103.
At the time of the reacquisition, the unamortized premium on bonds payable is P 200,000, and accrued interest on the
treasury bonds is P30,000 which is paid in cash.

 Formula

Face amount of Treasury Bonds 1,000,000

Applicable Premium (1M/5M x 200,000) 40,000
Carrying Amount 1,040,000
Less: Reacquisition Price (1M x 1.03) (1,030,000)
Gain on acquisition of Treasury Bonds 10,000

Reacquisition Price 1,030,000

Accrued Interest on the Bonds 30,000
Total Cash Payment 1,060,000

 Journal Entries

Treasury Bonds 1,000,000

Premium on Bonds Payable 40,000
Interest Expense 30,000
Sinking Fund 1,060,000
Gain on Acquisition of Treasury Bonds 10,000
(Acquisition of the Treasury Bonds)
*Situation: Treasury bonds are reissued for 1,200,000

Cash 1,200,000
Treasury Bonds 1,000,000
Premium on Bonds Payable 200,000
(Reissuance at a Premium)

**Situation: Treasury bonds are reissued for 900,000

Cash 900,000
Discount on Bonds Payable 100,000
Treasury Bonds 1,000,000
(Reissuance at a Discount)

***Situation: Treasury bonds when not subsequently sold

Bonds Payable 1,000,000

Treasury Bonds 1,000,000
(Reissuance at a Discount)

 Statement Presentation

Bonds payable 5,000,000

Treasury Bonds (1,000,000)
Bonds Payable issued and outstanding 4,000,000
Premium on Bonds Payable 160,000
Carrying Amount 4,160,000

BOND REFUNDING

 Floating of new bonds the proceeds from which are used in paying the original bonds
 Premature retirement of the old bonds by means of issuing new bonds
 Also known as bond refinancing
 When made on the date of maturity of the old bonds , no accounting problem arises as this would simply
call for the cancellation of the bond liability
 When made before the maturity date consideration must be given to the refunding charges (unamortized
bond discount or premium and redemption premium) pertaining to the old bonds. this shall be charged to
loss on extinguishment
 Shall be accounted for as an extinguishment of a financial liability
Illustration: Issuance of a new 10-year 10% bonds payable, with face amount of 1,500,000 for 1,600,000

To record the retirement of the old bonds payable

Bonds payable XXX

Loss on extinguishment of bonds payable XXX
Cash XXX
Discount on bonds payable XXX

Bonds payable XXX

Discount on bonds payable XXX
Carrying Amount XXX
Less: Retirement Price XXX
Loss on extinguishment XXX

To record the issuance of the new bonds payable

Cash XXX
Bonds Payable XXX
Premium on Bonds Payable XXX

AMORTIZATION OF BOND DISCOUNT OR PREMIUM

A. Straight Line Method: equal amortization

B. Bond Outstanding Method: applicable to serial bonds for it gives recognition to the diminishing balance of
the bonds payable. Based on the theory that interest expense shall decrease every year by reason of the
decreasing principal bond liability

BOND OUTSTANDING AMORTIZATION TABLE

YEAR BOND OUTSTANDING FRACTION PREMIUM AMORTIZATION
2022 5,000,000 5/15 100,000
2023 4,000,000 4/15 80,000
2024 3,000,000 3/15 60,000
2025 2,000,000 2/15 40,000
2026 1,000,000 1/15 20,000
15,000,000 300,000

C. Effective Interest rate Method

BOND OUTSTANDING AMORTIZATION TABLE

YEAR PAYMENTS INTEREST EXPENSE AMORTIZATION PRESENT VALUE
(A) (B) (C) (D)
= Face Amount x
=Dx% =A-B = Previous Balance ± C
Nominal Rate
XX1 XXX
XX1 XXX XXX XXX XXX
XX2 XXX XXX XXX XXX
XX3 XXX XXX XXX XXX
SERIAL BONDS

Cash (5M x 0.97) 5,300,000

Jan 1 Premium on Bonds Payable 300,000
Bonds Payable 5,000,000
(Issuance of the bonds)

Interest Expense (P5M x 12% x 6/12) 300,000

June 30
Cash 300,000
(Payment of semi-annual interest)

Interest Expense (P5M x 12% x 6/12) 300,000

Dec 31
Accrued Interest Payable 300,000
(Payment of semi-annual interest)

Premium on bonds payable 100,000

Dec 31
Interest Expense 100,000
(Accrual of Interest)

Interest Expense 1,000,000

Dec 31
Discount on Bonds Payable 1,000,000
(Payment of first series on bonds)

PREMATURE RETIREMENT OF SERIAL BONDS

 Step 1: Get the ratio between Total Premium or Discount to the Common Denominator of the Fractions.
This will get you the Amortization rate per year

Amortization rate per year = 300,000 /15,000,000 = 0.02

 Step 2: Multiply the rate to the bonds retired to get the Unamortized Premium or Discount

Unamortized Premium or Discount = 1,000,000 x 0.02 = 20,000

 Step 3: Multiply the unamortized premium or discount per year by the period from the date prior
redemption date

Unamortized Premium or Discount applicable to bonds retired = 20,000 x 2 years = 40,000