AE 18 — Intermediate Accounting II, Topic 2

Bonds Payable
Issuance, recognition and measurement of bonds payable including its retirement and
refunding

Miles N.M. Santos, CPA

Assistant Professor I
Faculty — College of Business, Management and Accountancy
Colegio de la Purisima Concepcion

1
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.

In simple language, a bond is a contract of debt whereby one party called the issuer borrows funds
from another party called the investor.
A bond is evidenced by a certificate and the contractual agreement between the issuer and investor
is contained in a document known as bond indenture.

2
Issuance of bonds as to the nature of transaction

The amount of cash received Journal entry at the date of

Manner of issuing bonds
by the issuer issuance

Issuance of bonds at a premium The cash consideration received Cash

by the issuer is greater than the Bonds payable
face amount of the bond Premium on bonds payable

Issuance of bonds at a discount The cash consideration received Cash

by the issuer is less than the Discount on bonds payable
face amount of the bond Bonds payable

3
Issuance of bonds as to the date of issuance

The amount of cash received by Journal entry at the date of

Manner of issuing bonds
the issuer issuance

Cash
Bonds payable
Premium on bonds payable
The cash consideration received by
Issuance of bonds on interest date
the issuer excludes interest
Cash
Discount on bonds payable
Bonds payable

The cash consideration received by
Issuance of bonds between interest
the issuer is includes interest as
date
of the date of issue
Cash
Bonds payable
Premium on bonds payable
Accrued interest payable
Cash
Discount on bonds payable
Bonds payable
Accrued interest payable

4
Initial and subsequent measurement of bonds

Treatment of
bond issue Calculation of Gain or loss
Designation Initial Subsequent
cost at the interest on change of
of bonds measurement measurement
date of expense FV
issuance

Fair value at the Fair value at the

Face amount of
date of beginning of the
Bonds elected Fair value at the the bond
issuance, in the period less fair
using the fair Expensed end of the multiplied by the
absence of value at the end
value option reporting period stated rate
which, it is the of the reporting
(FA x sr)
present value period

Fair value at the Carrying amount

date of Deducted to the of the preceding
Bonds Amortized cost
issuance, in the fair value or the period multiplied
measured at using the None.
absence of present value of by the effective
amortized cost effective interest
which, it is the the bonds rate
present value (CA x er)
5
 The fair value of the bonds at the date of issuance is best reflected by the amount of cash received by the issuer. It can also be
determined by the multiplying the face amount of the bonds by the quoted market price prevailing at the date of issuance.
In the absence of the foregoing, fair value is equal to the present value of the future cash flows required to settle the bonds.

Manner of payment Computation of present value

Both the principal and the interest Principal plus the total interest Present value =
is payable at maturity multiplied by the present value factor (Principal + Total Interest) x PV1
of 1

Principal is payable at maturity Principal multiplied by the present Present value =

while interest is periodically value factor of 1 plus interest payments (Principal x PV1) + (Interest payments x
multiplied by the present value factor PVOA)
of ordinary annuity

Both the principal and the interest Principal repayments plus interest Present value =
is payable periodically payments multiplied by the present (Principal repayments + Interest
value factor of ordinary annuity payments) x PVOA

Computation of PV of bonds at the date of issuance 6

 Bond issue costs are transaction costs directly attributable to the issue of bonds
payable.

Such costs include printing and engraving costs, legal and accounting fee, registration fee with
regulatory authorities, commission paid to agents, and underwriters and other similar charges.

Under IFRS 9, bond issue costs shall be deducted from the fair value of issue price of the bonds
payable in measuring initially the bonds payable.

However, if the bonds are measured at fair value through profit or loss, the bond issue costs are
expensed immediately.

Bond issue cost 7

 The measurement of bonds payable subsequent to the date of issuance and the amount reflected during
the end of the reporting period is called the carrying amount, i.e., the amount being carried in the books
of accounts.
When the bonds are irrevocably designated by the fair value option, the bonds are carried in the
books at fair value. In other words, its carrying amount at the end of the reporting period is simply its
fair value as of that date.
In effect, there is either gain or loss on change of fair value to be recognized at the end of the reporting
period. This is simply computed as the difference of the fair value at the beginning of the period and the
fair value at the end of the reporting period. Such gain or loss is closed to the profit or loss statement of
the entity.

Because the bonds at this designation are simply carried at its fair value, the interest paid or expensed
does not affect the bonds’ carrying amount. The interest, thereon, is immediately recognized as an
expense and it is computed by multiplying the face amount by the stated interest rate.

Subsequent measurement of bonds measured at fair value through P/L 8

 To record interest expense accrued or paid at the end of the reporting period:

Interest expense xx
Accrued interest payable/Cash xx

To record gain or loss on change of fair value at the end of the reporting period:

Bonds payable xx
Gain on change of fair value of bonds xx

or;

Loss on change of fair value xx

Bonds payable xx

Subsequent measurement of bonds measured at fair value through P/L 9

 The carrying amount of the bonds at amortized costs is calculated using the amortization through
effective interest method.

Principal Interest
Interest paid Amortization Carrying
Date repayments expense
(B) (D) amount
(A) (C)

1/1/2022 xx

12/31/2022 (FA x sr) (CA x er) (A+B) - C Carrying

amount of
the
preceding
period minus
the
amortization

Subsequent measurement of bonds at amortized cost 10

 To record interest paid at the end of the reporting period:

Interest expense
Accrued interest payable/Cash

To record interest expense at the end of the reporting period:

Interest expense
Discount on bonds payable*

or;

Premium on bonds payable*

Interest expense

*The amount credited to discount or debited to premium is the interest expense per
amortization table minus the interest paid.

Subsequent measurement of bonds at amortized cost 11

Bonds early full retirement

Stated differently, bonds are retired when such bonds are reacquired by the issuing entity while subsisting or when
such bonds are already settled. Retirement of bonds prior to its maturity date shall require derecognition of the
bonds and the recognition of either gain or loss on early retirement.

Bonds at FV option
Bonds payable xx
Accrued interest payable xx
Retirement price plus accrued interest as of the xx Loss on early retirement* xx
date of retirement Cash
xx
Less: Carrying amount of the bonds at the (xx) Gain on early retirement* xx
retirement date
Bonds at AC (discount)
(Gain) or loss on early retirement (xx) xx Bonds payable xx
Accrued interest payable xx
Loss on early retirement* xx
Cash
xx
Gain on early retirement* xx
Discount on bonds payable xx
12
Bonds early partial retirement

Bonds at FV option
Retirement price plus accrued interest as of the xx Bonds payable xx
date of retirement** Accrued interest payable xx
Loss on early retirement xx
Less: Carrying amount of the bonds at the (xx) Cash
retirement date* xx
Gain on early retirement xx
(Gain) or loss on early retirement (xx) xx
Bonds at AC (discount)
Bonds payable xx
Accrued interest payable xx
*Carrying amount of the bonds at the Loss on early retirement xx
retirement date multiplied by the quotient Cash
of the portion of bonds retired over the xx
total bonds Gain on early retirement xx
Discount on bonds payable xx

**Accrued interest only pertains to the

portion of the bonds retired

13