DYNAMIC SOCIETY OF ACCOUNTING STUDENTS

3rd PEER TUTORIAL

SESSION
Bonds Payable & Compound Financial Instrument (ACC 211)

October 29, 2022 | BE Bldg

PRE-TEST
The amortized cost of bonds payable means:
a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable or minus discount on
bonds payable
The amortized cost of bonds payable means:
a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable or minus discount on
bonds payable
The discount on bonds payable is reported as
a. A prepaid expense
b. An expense account
c. A current liability
d. A contra liability account
The discount on bonds payable is reported as
a. A prepaid expense
b. An expense account
c. A current liability
d. A contra liability account
Bond that mature on a single date are called
a. Term bonds
b. Serial Bonds
c. Callable Bonds
d. Convertible Bonds
Bond that mature on a single date are called
a. Term bonds
b. Serial Bonds
c. Callable Bonds
d. Convertible Bonds
A bond convertible by the holder into fixed number of ordinary shares of
the issuer is

a. A compound financial instrument

b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
A bond convertible by the holder into fixed number of ordinary shares of
the issuer is

a. A compound financial instrument

b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
What is the principal accounting for a compound financial instrument?

a. The issuer shall classify a compound instrument as either liability or equity

b. The issuer shall classify the liability and equity components of a compound
instrument separately as liability or equity instrument
c. The issuer shall classify a compound instrument as a liability in its entirety, until
converted into equity
d. The issuer shall classify a compound instrument as a liability in its entirety
What is the principal accounting for a compound financial instrument?

a. The issuer shall classify a compound instrument as either liability or equity

b. The issuer shall classify the liability and equity components of a compound
instrument separately as liability or equity instrument
c. The issuer shall classify a compound instrument as a liability in its entirety, until
converted into equity
d. The issuer shall classify a compound instrument as a liability in its entirety
Jaguar Company had the following long-term debt:

Sinking fund bonds, maturing in installments 2,200,000

Industrial revenue bonds, maturing in installments 1,800,000
Subordinated bonds, maturing on a single date 3,000,000

What is the total amount of serial bonds?

a. 3,000,000 
b. 4,000,000
c. 4,800,000
d. 7,000,000
Jaguar Company had the following long-term debt:

Sinking fund bonds, maturing in installments 2,200,000

Industrial revenue bonds, maturing in installments 1,800,000
Subordinated bonds, maturing on a single date 3,000,000

What is the total amount of serial bonds?

a. 3,000,000 
b. 4,000,000
c. 4,800,000
d. 7,000,000
During the current year, Booth Company incurred the following costs in connection with
the issuance of bonds:
Promotion cost 200,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration 100,000
Commissions paid to underwriter 1,500,000

What amount should be recorded as bond issue costs to be amortized over  term of the
bonds?

a. 2,550,000 c. 1,500,000
b. 2,750,000 d. 1,050,000
During the current year, Booth Company incurred the following costs in connection with
the issuance of bonds:
Promotion cost 200,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration 100,000
Commissions paid to underwriter 1,500,000

What amount should be recorded as bond issue costs to be amortized over  term of the
bonds?

a. 2,550,000 c. 1,500,000
b. 2,750,000 d. 1,050,000

All costs incurred are treated as bond issue costs

On January 31, 2019, Cheer Company issued P3,000,000 maturity value, 12%
bonds for P3,000,000 cash. The bonds are dated December 31, 2018 and mature
on December 31, 2028. Interest is payable semiannually on June 30 and
December 31.

What amount of accrued interest payable should be reported on September 30,

2019?

a. 270,000
b. 240,000
c. 180,000
d. 90,000
On January 31, 2019, Cheer Company issued P3,000,000 maturity value, 12%
bonds for P3,000,000 cash. The bonds are dated December 31, 2018 and mature
on December 31, 2028. Interest is payable semiannually on June 30 and
December 31.

What amount of accrued interest payable should be reported on September 30,

2019?

a. 270,000
b. 240,000
c. 180,000
d. 90,000
At year-end, Lala Company issued 5,000 8%, 10-year bonds, P1,000 face amount with
detachable share warrants at 110. Each bond carried a detachable warrant for ten ordinary
shares of Lala Company at a specified option price of P25 per share. The par value of the
ordinary share is P20.
Immediately after issuance, the market value of the bonds without the warrants was
P5,400,000 and the market value of the warrants was P600,000.

What is the carrying amount of bonds payable at year-end?

a. 5,000,000
b. 4,950,000
c. 4,900,000
d. 5,400,000
At year-end, Lala Company issued 5,000 8%, 10-year bonds, P1,000 face amount with
detachable share warrants at 110. Each bond carried a detachable warrant for ten ordinary
shares of Lala Company at a specified option price of P25 per share. The par value of the
ordinary share is P20.
Immediately after issuance, the market value of the bonds without the warrants was
P5,400,000 and the market value of the warrants was P600,000.

What is the carrying amount of bonds payable at year-end?

a. 5,000,000
b. 4,950,000
c. 4,900,000
d. 5,400,000
From the previous question, what is the entry to record the issue of bonds payable with share
warrants?

a. Cash 5,500,000
Bonds payable     5,000,000
Share warrants outstanding  500,000
b. Cash 5,500,000
Bonds payable     5,000,000
Premium on B/P       500,000

c. Cash 5,500,000
Bonds payable     5,000,000
Premium on B/P       400,000
Share warrants outstanding  100,000

d. Cash 5,000,000
Bonds payable     5,000,000
BONDS PAYABLE
DEFINITION OF TERMS
• Bond – a contract of debt whereby one party called the borrower or issuer
funds from another party called the investor or bondholder.
• Bond indenture – is the document which shows in detail the terms of the
bond and the rights and duties of the borrower and other parties to the
contract.
• Bond certificate – a certificate given to bondholders or investors to provide
evidence of ownership.
ELEMENTS OF A BOND
• Formal – contract of debt whereby the issuer borrowed funds from the investor.
• Unconditional promise – promise 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 is paid without condition.
• Made under seal – evidenced by a certificate.
MEASUREMENT OF BONDS PAYABLE

• INITIAL MEASUREMENT (commonly beg. of the year) (or between interest dates)
Designated at Fair Value through P/L - Fair value
Not designated at FV through P/L - FV less direct transaction cost (BIC)

• SUBSEQUENT MEASUREMENT (year-end)

Either at:
a. Amortized cost using effective interest (market/discount rate) method
b. Fair value through P/L
GENERAL PRINCIPLES

• If sales price > face amount - Premium on Bonds Payable

• If sales price < face amount - Discount on Bonds Payable

• If effective/discount/market rate < nominal rate - Premium on Bonds

Payable
• If effective rate > nominal rate - Discount on Bonds Payable
• 5,000T x (PV of 1 for 2 years? 0.8734 ) = 4,367T 2 years
• 400T x (PV of OA for 2 years? 1.8080 ) = 723,200 (Total = 5,090,200) (based on
8% nominal rate) (7% effective)
•
RETIREMENT OF BONDS

Retirement – the process of extinguishing the bond liability

If the bonds are retired at maturity , there is no accounting problem since there is no gain or
loss on retirement.

When bonds are retired before maturity, gain or loss on retirement can be computed as: Dr.
Bonds Payable (CA) 5,200T Dr. 300T loss Cr. Cash 5,500T
Gain (loss) on retirement = Retirement price – Carrying amount
BOND REFUNDING
BOND REFUNDING
BOND REFUNDING
COMPOUND FINANCIAL
INSTRUMENTS
DISCUSSION
COMPOUND FINANCIAL INSTRUMENT
A financial instrument that contains both a liability and an
equity element from the perspective of the issuer.
 ACCOUNTING FOR
COMPOUND FINANCIAL INSTRUMENT
“SPLIT ACCOUNTING” THROUGH RESIDUAL APPROACH

Step 1: Compute the fair value of the liability component.

Step 2: The fair value of the liability component is deducted from the total
consideration (net proceeds)

The residual amount is allocated to the equity component.

 COMMON FORMS OF
COMPOUND FINANCIAL INSTRUMENT

BONDS WITH SHARE CONVERTIBLE BONDS

WARRANTS
 When bonds are sold with share warrants, the
bondholders are given the right to acquire
shares of the issuing entity at a specified price
at some future time.

TWO SECURITIES:
• Bonds payable = the liability portions
• Share warrants = the equity portion
BONDS WITH SHARE
WARRANTS TYPES OF SHARE WARRANTS:
• Detachable (Separately)
• Non-detachable (Not separately)
 UPON ISSUANCE:

Cash (Net Proceeds) xx

Discount on BP xx
Bonds Payable (FV) xx
Ord. Share Warrants
Outstanding xx
BONDS WITH SHARE
WARRANTS Cash (Net Proceeds) xx
Bonds Payable (FV) xx
Premium on BP xx
Ord. Share Warrants
Outstanding xx
 UPON EXERCISE:

Compound Journal Entry

SWO (Share Premium) xx

Cash xx
Share Capital xx
BONDS WITH SHARE Share Premium(Gross) xx
WARRANTS

Note: Ordinary share warrants outstanding (OSWO)

is presented within share premium.
BOND CONVERSION
PRIVILEGE

Allows bondholders to convert their

bonds into shares or other securities
of the issuing entity within a certain
time frame.
CONVERTIBLE BONDS

The issue price of the convertible bonds shall

be allocated between the bonds payable and
the conversion privilege.
UPON ISSUANCE:

Cash (Net Proceeds) xx

Discount on BP xx
Bonds Payable (FV) xx
SP-CP xx

CONVERTIBLE BONDS
Cash (Net Proceeds) xx
Bonds Payable (FV) xx
Premium on BP xx
SP-CP xx
UPON EXERCISE:

Bonds Payable xx
Share Capital xx
Share Premium xx
Discount on BP xx

Bonds Payable xx
Premium on Bonds Payable xx CONVERTIBLE BONDS
Share Capital xx
Share Premium xx

SP-CP xx
Share Premium xx
ACTIVITIES
Anya Company is authorized to issue P6,000,000 of 6%, 10-year bonds dated
July 1, 2019 with interest payments on June 30 and December 31. When the
bonds were issued on November 1, 2019, the entity received cash of P6,300,000
including accrued interest. What amount was recorded as discount or premium
on bonds payable?

a. 180,000 bond premium

b. 80,000 bond premium
c. 180,000 bond discount
d. No bond premium and discount
On January 1, 2019, Ezra Company received P1,077,200 for 12% bonds with face amount
of P1,000,000. The bonds were sold to yield 10%. Interest is payable semiannually every
January 1 and July 1. The entity has elected the fair value option for measuring the
financial liability. On December 31, 2019, the fair value of the bonds is determined to be
P1,064,600 due to market and interest factors.

What amount should be reported as gain or loss from change in fair value of the bonds
for 2019?
a.64,600 gain
b.64,600 loss
c.12,600 gain
d.12,600 loss
On January 1, 2019, Castor Company issued 10% bonds in the face amount of
P1,000,000 that mature on December 31, 2028. The bonds were issued for
P886,000 to yield 12%, resulting in bond discount of P114,000. The entity used
the interest method of amortizing bond discount. Interest is payable on June 30
and December 31.

For the year ended December 31, 2019, what amount should be reported as
bond interest expense?

a.106,510 c. 53,160
b.100,000 d, 50,000
Bubbles Company reported 10% bonds payable with carrying amount of
5,700,000 on January 1, 2019. The bonds had a face amount of 6,000,000 and
were issued to yield 12%. The interest method of amortization is used. Interest
was paid on January 1 and July 1 of each year. On July 1, 2019, the entity retired
the bonds at 102. The interest payment on July 1, 2019 was made as scheduled.

What amount should be recorded as gain or loss on early extinguishment of the

bonds?

a. 420,000 gain c. 378,000 gain

b. 420,000 loss d. 378,000 loss
Magic Company provided the following information in relation to the issuance of bonds at the
beginning of current year:

Face amount 5,000,000

Term 10 years
Stated interest rate 6%
Interest payment date Every December 31
Yield 9%

What is the issue price of the bonds payable?

a. 5,000,000
b. 4,318,000
c. 4,035,400
d. 2,110,000
Middle Company issued P10,000,000 face amount 12% convertible bonds at 110 at
the beginning of current year. The bonds pay interest semiannually on January 1 and
July 1. It is estimated that the bonds would sell only at 103 without the conversion
feature. Each P1,000 bond is convertible into 10 ordinary shares with P100 par
value.

What is the increase in shareholders’ equity arising from the original issuance of the
convertible bonds payable?
a. 600,000
b. 700,000
c. 800,000
d. 0
At the beginning of current year, Copper Company issued P5,000,000 of 12%
nonconvertible 5-year bonds at 103. In addition, each P1,000 bond was issued with 30
detachable share warrants, each of which entitled the bondholder to purchase, for P50,
one ordinary share of Copper Company, par value of P25. The quoted market value of
each warrant was P4. The market value of the bonds ex-warrants at the time of issuance is
95.

What amount is credited to share premium if all of the share warrants are exercised?
a. 5,150,000
b. 4,750,000
c. 3,750,000
d. 4,150,000
At the beginning of the current year, Spaghetti Company issued 5,000 convertible bonds. The bonds
have a three year term and are issued at 110 with a face amount of 1,000 per bond. Interest is payable
annually in arrears at a nominal 6% interest rate. Each bond is convertible at anytime up to maturity
into 100 ordinary shares with par value of 5.When the bonds are issued, the prevailing market
interest rate for similar debt instrument without conversion option is 9%.The present value of 1 at
9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53.

What is the equity component arising from the original issuance of the convertible bonds?
a. 1,150,000
b. 1,650,000
c. 891,000
d. 391,000
At year-end, Zoe Company had outstanding 10%, P1,000,000 face amount convertible bonds
payable maturing in three years. Interest is payable on June 30 and December 31. Each P1,000
bond is convertible into 50 shares of P10 par value. The unamortized premium on bonds
payable was P60,000 at year-end. At year-end, 400 bonds were converted when Zoe's share had
a market price of P24. The entity incurred P4,000 in connection with the conversion. No equity
component was recognized when the bonds were originally issued.

What amount should be recorded as share premium from the issuance of shares as a result of
the bond conversion at year-end?
a. 176,000
b. 220,000
c. 276,000
d. 280,000
On January 1, 2019, Buttercup Company issued convertible bonds with a face amount of
P5,000,000 for P6,000,000. The bonds are convertible into 50,000 shares with P100 par value.
The bonds have a 5-year life with 10% stated interest rate payable annually every December
31. The fair value of the convertible bonds without conversion option is computed at
P5,399,300 on January 1, 2019. On December 31, 2021, the convertible bonds were not
converted but fully paid for P5,550,000. On such date, the fair value of the bonds without
conversion privilege is P5,400,000 and the carrying amount is P5,178,300.

What amount should be recorded as loss on the extinguishment of the convertible bonds
payable on December 31, 2021?

a. 221,700 c. 150,000
b.371,700 d. 0
POST-TEST
Convertible bonds
a. Have priority over other indebtedness
b. Are usually secured by a mortgage
c. Pay interest only in the event net income is sufficient to cover the
interest
d. May be exchanged for equity shares
Convertible bonds
a. Have priority over other indebtedness
b. Are usually secured by a mortgage
c. Pay interest only in the event net income is sufficient to cover the
interest
d. May be exchanged for equity shares
Bonds payable should be reported as noncurrent at

a. Face amount less any unamortized discount or plus any unamortized

premium
b. Current market price
c. Face amount less any unamortized premium or plus unamortized
discount
d. Face amount less accrued interest since the last interest payment date
Bonds payable should be reported as noncurrent at

a. Face amount less any unamortized discount or plus any unamortized

premium
b. Current market price
c. Face amount less any unamortized premium or plus unamortized
discount
d. Face amount less accrued interest since the last interest payment date
How would the amortization of premium on bonds payable affect the
carrying amount of bond and net income, respectively?

a. Increase and Decrease

b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
How would the amortization of premium on bonds payable affect the
carrying amount of bond and net income, respectively?

a. Increase and Decrease

b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
Issued convertible bonds are

a. Separated into liability and equity components with the liability

component recorded at fair value and the residual assigned to the equity
component
b. Always recorded using the fair value option
c. Recorded at face amount for the liability along with the associated
premium or discount
d. Recorded at face amount for the liability without consideration of a
premium or discount
Issued convertible bonds are

a. Separated into liability and equity components with the liability

component recorded at fair value and the residual assigned to the equity
component
b. Always recorded using the fair value option
c. Recorded at face amount for the liability along with the associated
premium or discount
d. Recorded at face amount for the liability without consideration of a
premium or discount
The major difference between convertible bonds and bonds issued with
share warrants is that upon exercise of the warrants
a. The shares are held by the issuer for a certain period before they are
issued to the warrant holder
b. The holder has to pay a certain amount to obtain the shares
c. The shares involved are restricted
d. No share premium can be part of the transaction
The major difference between convertible bonds and bonds issued with
share warrants is that upon exercise of the warrants
a. The shares are held by the issuer for a certain period before they are
issued to the warrant holder
b. The holder has to pay a certain amount to obtain the shares
c. The shares involved are restricted
d. No share premium can be part of the transaction
Intramurals Company reported the following long-term debt on December 31, 2019:

9% registered debentures, callable in 2020, due in 2021 3,500,000

11% collateral trust bonds, convertible into ordinary. shares beginning in 2020,
due in 2021 3,000,000

10% subordinated debentures, P500,000 maturing annually beginning in 2020 1,500,000

What is the total amount of term bonds?

 
a. 3,000,000 c. 5,000,000
b. 3,500,000 d. 6,500,000
Intramurals Company reported the following long-term debt on December 31, 2019:

9% registered debentures, callable in 2020, due in 2021 3,500,000

11% collateral trust bonds, convertible into ordinary. shares beginning in 2020,
due in 2021 3,000,000

10% subordinated debentures, P500,000 maturing annually beginning in 2020 1,500,000

What is the total amount of term bonds?

 
a. 3,000,000 c. 5,000,000
b. 3,500,000 d. 6,500,000
On June 30, 2019, Hakdog Company issued at 99, five thousand bonds of 8%,
P1,000 face amount.
The bonds were issued through an underwriter to whom the entity paid bond
issue cost of P425,000.

On June 30, 2019, what amount should be reported as bond liability?

 
a. 4,525,000
b. 4,950,000
c. 5,000,000
d. 4,575.000
On June 30, 2019, Hakdog Company issued at 99, five thousand bonds of 8%,
P1,000 face amount.
The bonds were issued through an underwriter to whom the entity paid bond
issue cost of P425,000.

On June 30, 2019, what amount should be reported as bond liability?

 
a. 4,525,000
b. 4,950,000
c. 5,000,000
d. 4,575.000
On July 1, 2019, Scrambble Company issued 4,000 bonds of 8%, P1,000 face
amount for P3,504,000. The bonds were issued to yield 10%. The bonds are
dated July 1, 2019 and mature on July 1, 2029. Interest is payable semiannually
on January 1 and July 1.

Using the effective interest method, what amount of the bond discount should
be amortized for the six months ended December 31, 2019?
 
a.30,400 c. 19,840
b.24,800 d. 15,200
On July 1, 2019, Scrambble Company issued 4,000 bonds of 8%, P1,000 face
amount for P3,504,000. The bonds were issued to yield 10%. The bonds are
dated July 1, 2019 and mature on July 1, 2029. Interest is payable semiannually
on January 1 and July 1.

Using the effective interest method, what amount of the bond discount should
be amortized for the six months ended December 31, 2019?
 
a.30,400 c. 19,840
b.24,800 d. 15,200
Taho Company issued 5,000 convertible bonds at the beginning of the current year. The bonds had a
four-year term with a stated rate of interest of 6%, and were issued at par with a face amount of
P1,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 50
ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is
9%.
At the issuance date, the amount of P485,000 was credited to share premium from conversion
privilege.

The bonds were not converted and instead, the entity paid off the convertible bondholders at
maturity.
 
What amount should be recorded as gain or loss on the full payment of the convertible bonds at
maturity?
a. 300,000 gain c. 485,000 gain
b. 485,000 loss d. 0
Taho Company issued 5,000 convertible bonds at the beginning of the current year. The bonds had a
four-year term with a stated rate of interest of 6%, and were issued at par with a face amount of
P1,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 50
ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is
9%.
At the issuance date, the amount of P485,000 was credited to share premium from conversion
privilege.

The bonds were not converted and instead, the entity paid off the convertible bondholders at
maturity.
 
What amount should be recorded as gain or loss on the full payment of the convertible bonds at
maturity?
a. 300,000 gain c. 485,000 gain
b. 485,000 loss d. 0
Taho Company issued 5,000 convertible bonds at the beginning of the current year. The bonds had a
four-year term with a stated rate of interest of 6%, and were issued at par with a face amount of
P1,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 50
ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is
9%.
At the issuance date, the amount of P485,000 was credited to share premium from conversion
privilege.

The bonds were not converted and instead, the entity paid off the convertible bondholders at
maturity.
 
The entry to record the issuance of the convertible bonds include:
a. Debit Bonds payable P 5,000,000
b. Credit Share Premium - conversion privilege P485,000
c. Credit Cash P5,000,000
d. Credit Premium on Bonds Payable P485,000
Taho Company issued 5,000 convertible bonds at the beginning of the current year. The bonds had a
four-year term with a stated rate of interest of 6%, and were issued with a face amount of P1,000 per
bond. Interest is payable annually on December 31. Each bond is convertible into 50 ordinary shares
with a par value of P10. The market rate of interest on similar nonconvertible bond is 9%. (PV of 1
0.7084, PVOA of 1 3.2397) 5,000,000 x 0.7084 + 300,000 x 3.2397 = CA = 4,513,910)
At the issuance date, the amount of P485,000 was credited to share premium from conversion
privilege.
Dr. Cash 5,000,000
Disc. On B/P 486,090
Cr. B/P 5,000,000 (no disc or premium)
Cr. SPCP 486,090
The bonds were not converted and instead, the entity paid off the convertible bondholders at
maturity
The entry to record the issuance of the convertible bonds include:
a. Debit Bonds payable P 5,000,000
b. Credit Share Premium - conversion privilege P485,000
c. Credit Cash P5,000,000
END.