Chapter 5

Bonds Payable

Instructor: Alyssa D. Colobong, CPA

Bonds

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 princial sum is paid.
Bonds

a contract of debt between the issuer (borrower) and

the investor (creditor) evidenced by a bond certificate
the contractual agreement between the parties is
sealed in a document called a bond indenture
Types of Bonds

TERM SERIAL

single date of maturity series of maturity dates

lump-sum payment and installment payments and
one-time retirement retirement of bond
Types of Bonds

SECURED UNSECURED

mortgage bonds debenture bonds

collateral trust bonds
Types of Bonds

REGISTERED COUPON/BEARER

bondholder is registered no record of who the

bond certificate is replaced bondholder is at a point
when bonds are sold in time
interest is paid to the interest is paid to the
registered bondholder holder of a detachable
interest coupon
Types of Bonds

Convertible bonds - can be exchanged to shares of the

issuing corporation
Callable bonds - may be redeemed prior to maturity
Guaranteed bonds - a guarantor promises to make
payments when the principal borrower fails to do so
Junk bonds - high-risk, high-yield bonds
Zero-coupon bonds - zero interest but with deep discount
 Our company needs P50M
additional fund for our
expansion so we're selling
50,000 bond certificates with
P1,000 face amount each.

Bond-Issuer
Investor
(Debtor)
(Creditor)
 Sale of Bonds

Underwriter/
Bond-Issuer Investment Bank Investor
(Debtor) (Creditor)
Measurement of Bonds Payable

Initial Measurement
General Rule: at fair value minus direct transaction costs
Exception: Bonds @FVPL are measured at fair value only

Fair value = present value of future cash payments

Fair value = issue price or net proceeds, excluding interest
Measurement of Bonds Payable

Subsequent Measurement
At amortized cost, using effective interest method or
At fair value through profit or loss
Amortized Cost

Initial measurement of bond payable xx

Principal repayment (xx)
+/- Cumulative amortization xx
Amortized cost of bond payable xx

The difference between the face

amount and present value of bond
(discount or premium) is amortized.
Accounting for Bond Issuance
Memorandum approach

To record the authorization To record the sale

Cash xx
Memorandum entry only Bonds payable xx
Accounting for Bond Issuance
Journal entry approach

To record the authorization To record the sale

Cash xx
Unissued bonds payable xx
Unissued bonds payable xx
Authorized bonds payable xx
Bond Premium vs. Bond Discount
Bond Premium
Sale Price of Bond (PV of Bond) > Face Amount of Bond
"gain" on the part of the issuer
effective rate < nominal rate of interest
to amortize, credit Interest Expense

Cash xx
Premium on bonds xx
Bonds payable xx
Interest expense xx
Premium on bonds xx

addition to BP account
Bond Premium vs. Bond Discount
Bond Discount
Sale Price of Bond (PV of Bond) < Face Amount of Bond
"loss" on the part of the issuer
effective rate > nominal rate of interest
to amortize, debit Interest Expense

Cash xx
Interest expense xx
Discount on bonds xx
Discount on bonds xx
Bonds payable xx

deduction from BP account

Bond Issue Costs

aka transaction costs or directly attributable costs to issue bonds

not an outright expense but amortized over the life of the bond
deducted from the issue price of bonds payable
lumped with discount on bonds payable (deducted from BP)
netted against the premium on bonds payable

if bonds are measured at FVPL, bond issue costs are expensed outright
Accounting for Interest on Bonds
1. Payment of interest during the year
2. Accrual of interest at the end of the year

Interest expense xx
Cash xx Interest expense xx
Accrued interest payable xx
Issuance of bonds on interest date
interest is recorded when paid and accrued
amortization of discount or premium may be on every interest
date or at the end of every year

Issuance of bonds between interest date

an accrued interest is paid by the buyer or investor
the accrued interest "sold" is credited to 1) interest expense,
or 2) accrued interest payable
Accounting for Bond Retirement
A. To record the retirement on maturity date

Bonds payable xx
Interest expense xx
Cash xx

when a sinking fund is maintained,

the sinking fund account is credited instead
Accounting for Bond Retirement
B. To record the retirement prior to maturity date

Determine or compute the following as of retirement date:

bond premium or discount to be amortized
balance of premium or discount to be cancelled
accrued interest
total cash payment
Retirement price xx
Accrued interest xx
Total cash payment xx
Accounting for Bond Retirement
B. To record the retirement prior to maturity date

Determine or compute the following as of retirement date:

carrying amount of bonds retired
CA = face amount + unamortized premium
CA = face amount - unamortized discount
gain or loss on retirement = retirement price less CA of bonds
gain if retirement price < CA of bonds
loss if retirement price > CA of bonds
Accounting for Bond Retirement
B. To record the retirement prior to maturity date

Bonds payable xx
Premium on bonds, if any xx
Interest expense xx
Loss on bond retirement, if any xx
Discount on bonds, if any xx
Gain on bond retirement, if any xx
Cash xx
Treasury Bonds

Treasury bonds are entity's own bonds originally issued

and reacquired but not cancelled.
Treasury Bonds
accounted as retirement of bonds prior to maturity
treasury bond is debited at face amount and any
unamortized discount or premium is cancelled
any accrued interest paid is charged to interest expense
acquisition cost less carrying amount of treasury bond = gain
or loss on acquisition of T-bonds
if re-issued, discount or premium is amortized over the
remaining life of bonds
presentation: deduction from bonds payable account
Accounting for Bond Refunding
aka bond refinancing
replacement of old bond with new bonds
accounted as premature extinguishment of bonds payable
date of maturity - no accounting problem
prior to maturity - refunding charges are considered
refunding charges include unamortized discount or
premium and redemption premium on the old bonds
refunding charges are charged to loss on extinguishment
Fair Value Option
by irrevocable designation, bonds payable may be measured initially
and subsequently at fair value through profit or loss
transaction costs or bond issue costs are expensed outright
no amortization since interest expense is at nominal rate
change in fair value attributable to CREDIT RISK is recognized to
other comprehensive income

1. Cash proceeds or issue price

Fair Value
2. Quotation (quoted prices)
of Bonds 3. Present value of cash flows
Amortization of Discount or Premium
1. Straight line method - equal periodic amortization = total bond
discount/premium divided by life of bonds
2. Bond outstanding method - applicable to serial bonds only
(periodic amortization diminishes, bond outstanding is determined
every year and multiplied to a fraction based on bond outstanding)
3. Effective interest method - aka interest or scientific method
(required method by PFRS 9)
Effective Interest Method
Nominal/Coupon/Stated Rate
This is the rate appearing in the bond certificate.
This is the basis of the periodic interest payments of the issuer.

Effective/Yield/Market Rate
This is the rate that exactly discounts estimated future payments.
This is the basis of the periodic interest expense of the issuer.
Effective Interest Method
bonds sold @ face amount
effective rate = nominal rate

bonds sold @ a premium

effective rate < nominal rate

bonds sold @ a discount

effective rate > nominal rate
Effective Interest Method
Interest paid (nominal interest) = face amount x nominal rate

Interest expense (effective interest) = CA of bond x effective rate

Premium amortization = nominal interest less effective interest

Discount amortization = effective interest less nominal interest

Carrying amount of bond = preceding CA +/- amortization

Effective Interest Method
Market price or issue price of bonds payable
PV of bonds payable xx Face amount x PV of 1
PV of total interest payments xx Nominal interest x PVOA of 1
Market price or issue price xx
Thank you!
For questions and clarifications,
don't hesitate to get in touch.