Accounting for

Bonds Payable
Definition of Bond
Definition of Bond

A 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.
Elements of a bond

A 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.
Process of Issuing Corporate Bonds

Power to incur, create or increase bonded indebtedness (Sec. 38);

requisites for the exercise of the power:
1. Vote required – the act must be approved by a:
a. Majority vote of the board of directors or trustees, and
b. 2/3 of the outstanding capital stock or 2/3 of the members in a meeting
called for the purpose
Process of Issuing Corporate Bonds

Power to incur, create or increase bonded indebtedness (Sec. 38);

requisites for the exercise of the power:
2. The incurring, creating, increasing of bonded indebtedness must be
certified to in a certificate duly signed by a majority of the directors
and countersigned by the chairman and the secretary of the
stockholders’ meeting and setting forth, among other information,
the bonded indebtedness incurred, created or increased, the actual
indebtedness of the corporation on the day of the meeting, the vote
obtained, etc.
Process of Issuing Corporate Bonds

Power to incur, create or increase bonded indebtedness (Sec. 38);

requisites for the exercise of the power:
3. The incurring, creating or increasing of bonded indebtedness must
be approved by the SEC.
4. The bonds so issued must be registered with the SEC which shall
have the authority to determine the sufficiency of the terms thereof.
Features of Bond Issue

• Bond indenture
• Bond Certificate
• If property is pledged as security, trustee
• Registrar or Disbursing Agent
Contents of Bond Indenture

• Characteristics of the bonds

• Maturity date and provision for repayment
• Period of grace allowed to issuing entity
• Establishment of sinking fund and the periodic deposit therein
• Deposit to cover interest payments
• Provisions affecting mortgaged property, such as taxes, insurance coverage, collection of interest or
dividends on collaterals
• Access to corporate books and records of trustee
• Certification of bonds by trustee
• Required debt to equity ratio
• Minimum working capital to be maintained if any.
Contents of Bond Certificate

• The name of the issuer

• The amount to be paid back to the investor
• The date of repayment
• The rate of interest to be paid on the borrowed funds
• A unique certificate identification number
Types of Bonds
As to Issuer

Corporation Corporate Bonds

Who is the
issuer?
Government or
Government
Treasury Bonds
As to Maturity

In lumpsum Term Bonds

How do bonds
mature?
In installment Serial Bonds
As to Security

Secured by mortgage
Mortgage Bonds
on real properties

Yes Secured Bonds

Secured by stocks and
Is there a property
bonds of other Collateral Bonds
held as security?
corporations
No Debenture Bonds
As to Registration

Yes Registered Bonds

Are the names of the
bondholders registered on
the books of the
corporation?
No Coupon or Bearer Bonds
As to Convertibility to Shares of Stock

Yes Convertible Bonds

Are the bonds
convertible into
shares of stock?
Non-convertible
No
Bonds
Other Types of Bonds

Convertible
Bonds

Callable
Bonds
Bonds
Guaranteed
Bonds

Junk Bonds
Accounting for Bonds
Payable
Incidence in the life of a Bond

Periodic Interest
(and principal if
Issuance Retirement
serial bonds)
payments
Accounting for Issuance of Bonds

Fair Value –
Amortized Cost
Transaction Cost
Initial
Measurement
FV through P/L Fair Value
Accounting for Issuance of Bonds

May be given in the problem (sold at 97,

at 103)

Present value of future cash payment to

What is Fair Value
settle the liability

You have to compute the present value of

the stream of payments of principal and
interest payment using effective rate
(when stated or nominal rate is different
from market or effective rate)
Accounting for Issuance of Bonds

Unavoidable Legal
What is Bond Issue
and Contract Cost of
Cost?
issuing bonds
Accounting for Issuance of Bonds

Fair Value of Bonds

Less Bond Issue Cost
Initial Measurement of
Net Cash Received
Bonds
Face Value of Bonds
Add: Premium
Less: Discount
Less: Bond Issue Cost
Accounting for Issuance of Bonds

Memorandum

Approaches

Journal Entry
Accounting for Subsequent Periods

For practical reason,

Amortized Cost using
straight line or bond
effective interest
outstanding method
method
After initial recognition, could be used
bonds payable shall be
measured either
Fair Value through
Profit or Loss
Accounting for Subsequent Periods

For practical reason,

Amortized Cost using
straight line or bond
effective interest
outstanding method
method
After initial recognition, could be used
bonds payable shall be
measured either
Fair Value through
Profit or Loss
 Accounting Summarized - Basic

Fair Value = Face Amount Fair Value > Face Amount Fair Value < Face Amount

Difference None Premium Discount

Cash Cash
Cash
Initial Entry Bonds Payable Discount on Bonds Payable
Bonds Payable
Premium on Bonds Payable Bonds Payable

Periodic Interest Payment (every interest Interest Expense Interest Expense Interest Expense
payment date) Cash Cash Cash

Amortization (every interest payment date or Premium on Bonds Payable Interest Expense
None
end of every year) Interest Expense Discount on Bonds Payable

Bonds Payable Bonds Payable Bonds Payable

Retirement
Cash Cash Cash
Accounting Concerns

• What if bond is issued on interest date.

• No Problem (do the entries above)
• What if bond is issued between interest dates?
• The investor should pay accrued interest for the period he didn’t hold the
bonds. This will affect only the initial entry, but subsequent entries are same as
above.
Initial Entry:
Cash XXXX
Bonds Payable XXXX
Interest Expense/AIE XXXX
Accounting Concerns

• What if bond year coincide with accounting year?

• No Problem (do the entries above)
• What if bond does not coincide with accounting year?
• Every year-end, usually Dec.31, but not always, recognize accrued interest
expense for the periods interest were incurred but not paid. Always note that
amortization is related to interest expense so beware of the implication of
recognition of A/I/E on amortization.
Accounting for Bond Retirement

Bond Retirement
Before Maturity
On Maturity
(Premature Retirement)

Settlement Price = Settlement Price > Settlement Price <

In total Partial
Carrying Amount Carrying Amount Carrying Amount

Unextinguished portion –
Loss on Extinguishment of Gain on Extinguishment Check if there is G/L on Extinguished portion – continue interest and
No Concern
Bonds of Bonds extinguishment check if there is G/L amortization, but only to
the outstanding bonds
 Accounting Summarized – Difference of Amortized
Cost Method and FVTPL
Amortized Cost Fair Value through Profit or Loss

Initial Measurement Fair Value less Transaction Cost Fair Value

Interest Expense Interest Expense

Interest Payment
Cash Cash

Amortization Yes None

Bonds Payable
Changes in Fair Value every end of the year None
Gain from Change in Fair Value

Bonds Payable Bonds Payable

Retirment
Cash Cash