06 Module 6 - Bonds Payable

Chapter 5
BONDS
PAYAB
LE
CONCEPTUAL FRAMEWORK
BONDS PAYABLE - Definition
 What is a Bond?
 Formal unconditional promise
(contract of debt) made under seal
(evidenced by a certificate with an
agreement called bond indenture)
 To pay a specified sum of money
 At a determinable future date
 To make periodic interest payment
at a stated rate
 Until the principal sum is paid in full
BONDS PAYABLE - Definition
 When do you use bonds?
 When large amounts of funds are
required, an entity borrows from the
general investing public through the
use of bond issue
 Who uses bonds?
 Usually and generally the
government and large
corporations
 Who are the parties in a bond
BONDS PAYABLE – Kinds of Bonds
 Term Bonds
 Bonds with single date of maturity
 Requires sinking fund to provide
adequate money to retire or redeem
the bond issue at maturity date (one
time)
 Serial Bonds
 Bonds with series of maturity dates
instead of a single one
 Retires or redeems the bonds by
installments.
 Secured Bonds
 Mortgage Bonds - secured by a
mortgage (collateral) on real
properties
 Collateral Trust Bonds –
secured by shares and bonds
of other corporations
 Unsecured Bonds
 Debenture Bonds – unsecured
 Registered Bonds
 Requires the registration of the
name of the bondholders on the
books of the corporation
 If bondholder sells a bond, the
old bond certificate is
surrendered and a new one is
issued to the buyer.
 Interest is periodically paid
 Coupon or Bearer Bonds
 Bondholders are not registered
in the books of the corporation
 Issuer does not maintain a
record of the bondholders at
any point in time
 Interest is paid upon
submission of the detachable
interest coupon
 Convertible Bonds
 Can be exchanged for shares of
issuer
 Callable Bonds
 May be called in for
redemption prior to maturity
date
 Guaranteed Bonds
 Another party promises to pay
The bond is purchased
BONDS PAYABLE – Kinds of Bonds at a
discount
 Junk Bonds(lesser cash out) but
will be redeemed
High-risk, at facebonds
high-yield value
orissued
face amount. The discount
by entities that are
isheavily
the gain upon redemption.
indebted or otherwise
weak financial condition.
 Zero-coupon Bonds
 Pays no interest but offers a
return in the form of a “deep
discount” or huge discount
BONDS PAYABLE – Features of Bond
Issue
a. Execution of a Bond Indenture or
Deed of Trust
 Document of the agreement
between parties showing the
details of the terms of the loan
and the rights and duties of the
borrower and other parties to
the contract
Issue
b. Use of Bond Certificates
 Each certificate represents a
portion of the total loan.
 Issued in various
denominations e.g. P1,000 each
certificate, or smaller ones
Issue
c. Property is pledged as security for
the loan
 If loan is collateralized or
secured, a trustee is assigned to
hold the title
 Trustee acts as representative
of the bondholders e.g. banks
or trust entity
Issue
d. Assignment of Registrar or
Disbursing Agent
 Usually a bank or trustee entity
 Borrower deposits interest and
principal payments to the
disbursing agent
 Disbursing agent distributes
the funds to the bondholders
BONDS PAYABLE – Contents of
Bond Indenture
 Contents of the contract between the
bondholder(investor/ lender) and
borrower (issuer)
a. Characteristics of the bonds
b. Maturity date & provision for
repayment
c. Period of grace allowed to
borrower/issuer
d. Establishment of a sinking fund &
BONDS PAYABLE – Contents of
Bond Indenture
 Contents of the contract between the
bondholder(investor/ lender) and
borrower (issuer)
f. Provision affecting mortgaged
property, such as taxes, insurance
coverage
g. Access to corporate books &
records of trustee
h. Certification of bonds by trustee
BONDS PAYABLE – Sale of Bonds
 Bonds are denominated at either
equal or various amounts to
accommodate more buyers
 The denomination is called the face
amount.
 Bond certificate evidences each
denomination of bond.
 Illustration: If bonds with face of
50,000,000 are sold, divided into
P1,000 denomination, 50,000 bond
Firm Commitment –
All orBest
None Efforts–
Underwriter
– Unless Itthe
is aentire
agrees marketed
to buy the
BONDS deal where
PAYABLE
issue isentire
sold at
issue the
–
the at underwriter
Sale
offering of Bonds
a certain price.
sells
 Sale
price, the the
may bebonds
undertaken
If underwriter
deal is voided at anbyagreed
fails the
andto sell the
borrower
price but itself
it is or
not financially or
theBorrower
underwriter
entiremay
issue, will
also itsell
must
not
to antake full
receivelegally responsible
financial
any compensation. for any
underwriter orresponsibility
investment bank for the
that
unsold
assumes the unsold bonds.
reselling bonds.
of the bonds to
investors.
 Underwriter may sell under firm
commitment, best efforts or “all or
none”.
 Underwriter may sell on the basis of
commission to be deducted from the
 Borrower/Issuer shall pay the face
amount of the bond issue on maturity
date and the periodic interest.
 Periodic interest payments are
usually semi-annually or every six
months as follows:
 January 1 and July 1
 February 1 and August 1
 March 1 and September 1
 April 1 and October 1
 May 1 and November 1
 June 1 and December 1
 Periodic interest payments may also
be made quarterly at the end of the
quarter or annually at the end of
every bond year
BONDS PAYABLE – Initial
Measurement
 PFRS 9, Par 5.1.1:
 Bonds payable NOT DESIGNATED
AT FAIR VALUE THROUGH
PROFIT OR LOSS shall be
measured initially at FAIR VALUE
MINUS TRANSACTION OR BOND
ISSUE COSTS that are directly
attributable to the issue of the bonds
payable.
BONDS PAYABLE – Initial
Measurement
 If Bonds payable are DESIGNATED
AND ACCOUNTED FOR AT FAIR
VALUE THROUGH PROFIT OR
LOSS, the TRANSACTION OR BOND
ISSUE COSTS shall be treated as an
expense immediately
 What is Fair Value of the Bonds
Payable?
 The same as the issue price or net
BONDS PAYABLE – Subsequent
Measurement
 PFRS 9, Par 5.3.1: After initial
recognition, bonds payable shall be
measured either:
a. At amortized cost, using the effective
interest method (For not designated)
b. At fair value through profit or loss
(for designated)
BONDS PAYABLE – Subsequent
Measurement
 Amortized Cost of Bonds Payable
(PRESENT VALUE METHOD)
 It is the amount at which the bond
liability is measured initially minus
principal repayment, plus or minus the
cumulative amortization using the
effective interest method of any
difference between the face amount and
present value of the bonds payable.
 The difference between the face amount
BONDS PAYABLE – Accounting for
Issuance
 Two approaches:
a. Memorandum approach
b. Journal entry approach
APPLICATION OF CONCEPTS
Issuance
 Illustration
 On January 1, 2020, an entity is
authorized to issue 10-year, 12%
bonds
 Face amount of P5,000,000
 Interest payable January 1 and
July 1
 5,000 units of P1,000 face amount
Issuance
 Memorandum Approach – Entry in
the General Journal
 On January 1, 2020, the entity is
authorized to issue face amount
of P5,000,000 10-year, 12%
bonds, interest payable January
1 and July 1, consisting of 5,000
units of P1,000 face amount
Issuance
 Memorandum Approach – Entry is
 To record the sale of the bonds at
face amount:
Cash 5,000,000
Bonds Payable 5,000,000
 The memorandum approach is

the one that is generally followed.
Issuance
 Journal Entry Approach
 To record the authorization of
the bonds
Unissued bonds payable
5,000,000
Authorized Bonds Payable
5,000,000
 To record the sale of the bonds at
BONDS PAYABLE – Issuance at a
Premium
 Bond is sold at a premium when the
sales price is more than the face
amount of the bonds
 Premium is not recorded as an
outright gain but amortized over
the life of the bond.
 Illustration
Premium
 Illustration
 An entity issued bonds with face
amount of P5,000,000 at 105.
The quoted price of “105” means
“105%” of the face amount of the
bonds. Thus, the sales price is
P5,250,000 (P5,000,000 x 105%)
Premium
 Journal Entry
 To record sale of bond at a premium
Cash 5,250,000
Premium on Bonds Payable
250,000
 To record amortization of premium
over 10 years (life of bond) using STL
Method
Premium
 What Does Selling at a Premium Mean?
 The investor or buyer is amenable to
receiving interest lower than the nominal
rate (stated on the bond issue while
effective rate is the actual received).
 Premium is in effect a GAIN.
 The amount payable by the issuer will
only be up to P5,000,000 which is the face
amount.
 The premium is not reported outright as
Discount
 When the sales price is less than the face
amount
 Example: Face amount of P5,000,000 @ 95
 To record sale of bond at a discount
Cash 4,750,000
Discount on Bonds Payable 250,000
Premium on Bonds Payable 250,000
 To record amortization of premium over
10 years (life of bond)
Interest Expense 25,000
BONDS PAYABLE – Presentation
 Both discount and premium are
reported as ADJUSTMENTS TO THE
BOND LIABILITY ACCOUNT
 Discount as a deduction from the
bond payable
 Represents the amount the issuer
cannot borrow because of interest
difference
 Premium as an addition to the bond
payable

BONDS PAYABLE – Presentation
 Both shall not be considered separate
from the bonds payable account.
 Both shall be treated consistently as
valuation accounts of the bond liability.
 Noncurrent liabilities
Discount on Bonds Payable (250,000)
4,750,000
 Noncurrent liabilities
Premium on Bonds Payable 250,000
BONDS PAYABLE – Bond Issue Cost
 Transaction Costs directly attributable
to the bond issue
 Examples: Printing & engraving cost,
legal and accounting fee, registration
fees with regulatory authorities,
commission paid to agents and
underwriters, etc.
 Under PFRS 9, Measurement
 In general , bond issue cost shall be
deducted from the fair value or issue
price of the bonds payable at initial
measurement.
 IF NOT DESIGNATED AS FVPL or
effective interest method of
amortization (Present Value or
Discounting),
 Lumped with the discount on bonds
payable (in case of sale with discount)
 Netted against the premium on the
bonds payable (in case of a sale with
premium)
 IF DESIGNATED AS FVPL
 Expensed immediately
BONDS PAYABLE – Journal Entries
 RecordingIMPORTANT!
involve
TAKE
1. Sale of the Bond NOTE!
2. Payment of interest during the
year SEQUENCE OF
JOURNAL
 depending on theENTRIES
interest
payment
IN terms
RECORDING
 check the date when bond was
BONDS
sold PAYABLE!
to determine when will be
the 1st interest payment and for
the interest accrual
BONDS PAYABLE – Illustration
 On March 1, 2020, an entity sold
bonds with face amount of
P5,000,000 and 12% interest payable
semiannually on March 1 and
September 1.
 Inasmuch as the bonds are sold on
March 1, 2020, the first payment of
interest will be on September 1, 2020
APPLICATION
1. RECORD THE OF CONCEPTS
BONDS SALE
PAYABLE
OF THE – Journal Entries
 2020 BOND
Mar. 1 Cash 5,000,000

Record the sale of bonds
APPLICATION
BONDS PAYABLE
INTEREST – Journal Entries
 2020 PAYMENT
Sept. 1 Interest Expense 300,000
3. AT YEAREND,
Cash
RECORD THE
300,000
Semiannual
ACCRUED interest payment
INTEREST
(5,000,000 x 12% x 1/2 = 300,000)
Dec 31 Interest Expense 200,000
Accrued Interest Payable
200,000
(5,000,000 x 12% x 4/12 =
200,000)
4. AT START OF
YEAR, RECORD
SUBSEQUENT
REVERSAL OF
BONDS PAYABLE –
YEARS Journal
ACCRUED INTEREST
Entries
 2021
Jan. 1Accrued Interest
5. RECORD 1 SEMI Payable
ST
ANNUAL INTEREST
200,000 PAYMENT
Interest Expense 200,000
Reversal of accrual
Mar 1 Interest Expense 300,000
Cash 300,000
(5,000,000 x 12% x 6/12 =
300,000)
6. RECORD 2ND SEMI
ANNUAL INTEREST
BONDS PAYABLE
PAYMENT– Journal Entries
 2021
Sept. 1 Interest Expense 300,000
7.Cash
RECORD ACCRUED300,000
INTEREST AT
(5,000,000 x 12% = 300,000)
YEAREND
Semiannual interest payment
200,000
(5,000,000 x 12% x 4/12 =
200,000)
BONDS PAYABLE – Sale Exactly On
Interest Date
 On June 1, 2020, an entity issued
bonds with face amount of
P5,000,000 at 97.
 The bonds mature in 5 years and
pay 12% interest semiannually on
June 1 & December 1
 Use straight line method to simplify
in amortizing discount.
APPLICATION
BONDS PAYABLE
SALE WITH – Journal Entries
DISCOUNT
 2020
June 1Cash
2. RECORD THE 4,850,000
Discount on bonds payable
INTEREST
150,000 PAYMENT

Cash 300,000
(5,000,000 x 12% )/ 2 = 300,000)
Semiannual Interest payment
APPLICATION
BONDS PAYABLE
ACCRUED – Journal Entries
INTEREST
 2020
Accrued Interest Payable 50,000
4. RECORD THE
(5,000,000 x 12%
AMORTIZATION
x 1/12 = 50,000)
(Dec 1 to 31, 2020)
Discount on bonds payable
17,500
(150,000 / 5 years x 7/12 = 17,500)
(Issue Date June 1 to Reporting Date
APPLICATION
5. RECORD THEOF CONCEPTS
SUBSEQUENT
BONDS PAYABLE
REVERSAL OF– On
YEARS Interest Date
THE ACCRUAL
 2021
Jan 01 Accrued Interest
6. RECORD THE
Payable
50,000 1 INTEREST
ST
Interest
PAYMENTExpense 50,000
June 1 Interest Expense 300,000

Cash 300,000
(5,000,000 x 12% / 2 = 300,000)
1st Semiannual Interest payment
7. RECORDSUBSEQUENT
THE
BONDS 2PAYABLE
ND – On
YEARS
INTEREST Interest Date
 2021 PAYMENT
8. Cash
RECORD THE 300,000
2nd Semiannual
ACCRUED Interest Payment for
INTEREST
the Year
Dec. 31 Interest Expense 50,000

50,000
(5,000,000 x 12% x 1 /12)
SUBSEQUENT
9. RECORD THE
BONDSAMORTIZATION
PAYABLE – On
YEARS Interest Date
 2021
Dec. 31 Interest Expense 30,000
Discount On Bonds Payable
30,000
(150,000 / 5 years = 30,000 full
year)

06 Module 6 - Bonds Payable

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06 Module 6 - Bonds Payable

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Chapter 5

 The memorandum approach is

Mar. 1 Cash 5,000,000

Bonds Payable 5,000,000

June 1 Interest Expense 300,000

Dec. 31 Interest Expense 50,000

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