BONDS PAYABLE

Jimenez
Montescarlos
Rotairo
 WHAT IS BONDS?
- Is a formal unconditional promise, made under
seal, to pay a specific sum of money at a
determinable future date and to make period
interest payment at a stated rate until the
principal sum is paid.
 BOND INDENTURE
- A document that contained the certificate and the contractual agreement
between the issuer and the investor.

- Content of Debt Indenture:

 Characteristic of bond
 Maturity date and provision of repayment
 Period of grace allowed to issuing entity
 Establishment of sinking fund
 Deposit to cover interest payment
 Provision affecting mortgaged property
 Access to corporate books and record of trustee
 Certification of bond of trustee
 Required debt to equity ratio
 Minimum working capital to maintain, if any.
 TYPES OF BONDS
• TERM BONDS- bond with single date of maturity.
• SERIAL BONDS- bond with a series date of maturity.
• MORTGAGE BONDS- bonds secured by a mortgage on real property.
• COLLATERAL TRUST BONDS- bonds secured by stocks and bonds of other corporation.
• DEBENTURE BONDS- bonds without collateral security.
• REGISTERED BONDS- require registration of the name of the bondholder on the books of the
corporation.
• COUPON BONDS- or also called as bearer bonds, these are unregistered bonds in the sense that the
name of the bondholder is not recorded on the entity books.
• CONVERTIBLE BONDS- bonds that can be exchanged for shares of the issuing entity
• CALLABLE BONDS- bonds which may be called in for redemption prior to maturity date
• GUARANTEED BONDS- bonds issued whereby another party promises to make payments if the
borrower fails to do so.
• JUNK BONDS- high risk and high yield bond issued by entity are heavily indebted or otherwise in
weak financial condition.
 SALE OF BONDS
• Bonds are divided into different denomination such as P100, P1,000 or
P10,000, thus it enables more than one buyer to purchase the bonds. But
often, the bonds are sold in equal denomination.

• The denomination amount serves to be the face value and each bond is
evidenced by a bond certificate.

EXAMPLE: if a P20,000,000 bonds are sold, divided by P1,000

denominations, there shall be 20,000 bond certificates containing a
face amount of P 1,000 each.

• Entity usually sold the entire bond issue to underwriter or investment bank
that will assumes the responsibility for reselling of bonds to investors.

• When an entity sells a bond issue, it undertakes to pay the face value of the
bond issue and the periodic interest which can be semi annually or annually.
 INITIAL MEASUREMENT
In accordance of PFRS 9
• For bonds not designated at fair value thru profit or loss shall be measured
initially at fair value minus transaction costs that are directly attributable to
the issue of bond payable.

*Fair value = present value of the future cash payment to settle the
bond liability.

• Bonds designated and accounted for “at fair value thru P/L” shall be measured
initially at fair value and bond issue costs are treated as expense
immediately.

*Fair value = to the issue price from the issue of the bonds excluding
accrued interest.
 SUBSEQUENT MEASUREMENT OF
BONDS PAYABLE
After the initial recognition, bonds shall be
subsequently measured either:

1. At amortized cost, using effective interest

method.
2. At fair value trough profit or loss
 ACCOUNTING FOR ISSUANCE OF
BONDS
• Memorandum Approach
• Journal Entry Approach
On January 1, 2018, an entity is authorized to issue 10-yea, 12 %
bonds with the face value of P5,000,000, interest payable
January 1 and July 1, consisting of 5,000 units of P1,00 face
amount. The bonds are sold to the face amount to an
underwriter.
Memorandum Entry Journal Entry
Authorization of the On January 1, 2018 “the entity is Unissued bonds payable P5,000,000
authorized to issue P5,000,000 Authorize bonds payable P5,000,000
bonds face amount. 10-year 12%
bonds, interest payable January
1 and July, consisting of 5,000
units of P1,000 face amount.”

Subsequent sale of Cash 5,000,000 Cash 5,000,000

Accounts Payable 5,000,000 Unissued Bonds Payable 5,000,000
bonds
 ISSUANCE OF BONDS AT PREMIUM
When the sale price is MORE THAN the face value of the bond

• In premium, effective rate is less than the nominal rate of

interest.

EXAMPLE: An entity issued with a face amount of P5,000,000 at 105, 12% 10

years.

Cash 5,250,000
Bonds Payable 5,000,000
Premium on bond payable 250,000
 ISSUANCE OF BONDS AT DISCOUNT
When the sale price is LESS THAN the face value of the bond

• In discount, effective rate is higher than the nominal rate of

interest.

EXAMPLE: An entity issued with a face amount of P5,000,000 at 95, 12% 10

years.

Cash 4,750,000
Discount on bond payable` 250,000
Bonds Payable 5,000,000
 ISSUANCE OF BONDS ON INTEREST DATE
• On January 1, 2018, 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 and December 1.

2018
06/01 Cash (5,000,000 x 97%) 4,850,000
Discount on Bonds Payable 150,000
Bonds Payable 5,000,000
12/01 Interest Expense 300,000
Cash 300,000

(Semiannually interest)
12/31 Interest Expense 50,000
Accrued Interest Expense 50,000

(5,000,000 x 12% x 1/12)

Interest Expense 17,500
Discount on Bonds Payable 17,500

(150,000/ 5 years= 30,000 x 7/12 = P17,500)

 ISSUANCE OF BONDS BETWEEN INTEREST
DATES
Illustration:
On April 1, 2016, an entity issued bonds with a face amount of P5,000,000 at
P5,228,000 plus accrued interest. The bonds are dated January 1, 2016,
mature in 5 years and pay 12% interest semiannually on January 1 and July 1.
The issue of the bonds on April 1, 2016 is recorded as follows:

Cash 5,378,000
Bonds payable 5,000,000
Premium on bonds payable 228,000
Interest expense 150,000
Issue price
5,228,000
Add: Accrued interest from January 1 to April 1, 2016
(5,000,000 x 12% x 3/12)
150,000
Total cash received
5,378,000

NOTE: If bonds are issued between interest dates. An

accrued interest is involved.
 In the illustration, the accrued interest on the date of sale for 3 months
from January 1 to April 1, 2016 is paid by the investor because on July 1,
2016, three months after the sale, the investor is going to receive interest
for 6 months from January 1 to July 1, 2016. In the foregoing entry, the
accrued interest “sold” is credited to interest expense.

On July 1,2016, to record the payment of semiannual interest is:

Interest expense ( 5,000,000 x 12% x1/2) 300,000
Cash
300,000

Another approach is to credit the accrued interest on the date of sale to accrued
interest payable account.
Cash 5,378,000
Bonds payable 5,000,000
Premium on bonds payable 228,000
Accrued interest payable 150,000
 If the accrued interest payable is credited for the accrued
interest sold at the time of the issue of the bonds, then the
payment of the first semiannual interest is recorded as
follows:

Accrued interest payable 150,000

Interest expense 150,000
Cash 300,000

In either case, the debit balance of the interest

expense account must be P150,000, the correct
interest expense.
 On December 31, 2016 , the adjusting entries
are:

a. Interest expense 300,000

Accrued interest payable 300,000
Interest accrued for 6 months from July 1 to December 31,
2016

b. Premium on bonds payable 36,000

Interest expense 36,000

Original life of bonds (5 years x 12) 60 months

Less: Expired life on the date of sale (January 1 to April 1) 3 months
Remaining life of the bonds 57 months

Monthly amortization (228,000/57 months) 4,000

Amortization for 9 months from April 1 to Dec. 2016 (4000 x 9) 36,000
If a statement of financial position is prepared on December 31, 2016, the
accrued interest payable of P300,000 is classified as current liability. The
bonds payable should be classified as non-current liability as follows:

Bonds payable, due January 1, 2021

5,000,000
Premium on bonds payable
192,000
Carrying amount
5,192,000
 BOND RETIREMENT ON MATURITY
DATE
Sinking fund or redemption funds
- a fund set aside for the liquidation of long-
term devt, more particularly bonds payable. As a
rule, sinking fund is classified as noncurrent
investment.

However, if the related bonds payable is due to be

settled within twelve months after the end of the
reporting period, the sinking fund shall be
reclassified as current asset because the bond
payable is also reclassified as current liability.
When bonds are paid on the date of maturity,
no accounting problems are encountered. This
would simply require the cancelation of the
bonds payable at the face amount and of
course, the payment of accrued interest on the
date of maturity.
 Illustration
An entity sold bonds with the face amount of
P5,000,000 on March 1, 2016 with 12% interest
payable March 1 and September 1 and the bonds
mature on March 1, 2021.
On March 1, 2021, the journal entry to retire the bonds together
with the payment of the last semiannual interest out of a sinking
fund:
Bonds payable 5,000,000
Interest expense 300,000
Sinking fund 5,300,000
If a sinking fund is not used, then payment of the bonds will come
from the general cash of the issuing entity.
Bonds payable 5,000,000
Interest expense 3,000,00
Cash
 If a sinking fund is not used, then
payment of the bonds will come
from the general cash of the issuing
entity.
Bonds payable 5,000,000
Interest expense 3,000,00
Cash
5,300,000
BOND RETIREMENT PRIOR TO MATURITY
DATE
Illustration
On March 1, 2016, bonds with face amount of P5,000,000
are issued for P 4,730,000. The bonds are dated March 1,
2016 and mature in % years, and pay 12% interest
semiannually on March 1 and September 1.

The straight line method of amortization is used for

simplicity.

All the bonds are retired on July 1, 2019 at 97.

The retirement of bonds prior to maturity are canceled

and permanently
1. The bond premium or bond discount should be amortized up to the
date of retirement.

The amortization of the bond discount is recorded up to July 1, 2019. If the

entity uses the calendar period, presumably, the last amortization was on
December 31, 2018.
Interest expense 27,000
Discount on bonds payable 27,000
(270,000/ 5 years= 54,000 annual amortization) (54000 x
1/2=27,000 semiannual

2. Balance of the discount on bonds payable

Discount on bonds payable-March 1, 2016 (54000 x 5 years)

270,000
Less: Amortization from March 1, 2016 to July 1, 2019 or 40 months
(270,000 x40/60)
180,000
Balance, July 1, 2019
90,000
3. The accrued interest on the date of retirement, July 1, 2019 is
computed as:

P5,000,000 x 12% x 4/12 = 200,000

4. The total cash payment is computed as follows:

Retirement price (P5,000,000 x97) 4,850,000
Add: Accrued interest 200,000
Total cash payment 5,050,000

5.The carrying amount is determined.

Bonds payable 4,910,000
Discount on bonds payable 4,850,000
Carrying amount on July 1, 2019 60,000
6. Gain or loss on the early retirement or extinguishment
Carrying amount of bonds payable 4,910,000
Less: Retirement price 4,850,000
Gain on early retirement 60,000

7. To record retirement of bonds on July 1, 2019

Bonds payable 5,000,000
Interest expense 200,000
Cash
5,050,000
Discount on bonds payable
90,000
Gain on early retirement
60,000