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I.A 2 Lecture 5 Liabilities

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8 views

I.A 2 Lecture 5 Liabilities

Uploaded by

Arong, Jheralgin Arevalo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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LIABILITIES

BONDS PAYABLE
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.

Bond indenture – A bond evidence by a certificate and the contractual


agreement between the issuer and investor is contained in a document
known as “ bond indenture”
Classification of bonds
• Term bonds
• Serial bonds
• Mortgage bonds
• Collateral trust bonds
• Debenture bonds
• Registered bonds
• Coupon or Bearer bonds
• Convertible bonds
• Callable bonds
• Guaranteed bonds
• Junk bonds
• Zero Coupon bonds
MEASUREMENT
INITIALLY SUBSEQUENTLY
Not designated at P/L FV - TC AC
Designated at P/L FV FV

Transaction cost = Bond issue cost


Accounting for BONDS
• Methods
• 1. Memorandum method – focus of discussion
• 2. Journal Entry method
Issuance: Payment of Interest:

Cash xx Interest Expense xx


Bonds payable xx Cash xx
-issuance is at face amount
Interest Expense xx
Cash xx Accrued Interest Payable xx
Bonds payable xx Cash xx
Premium on bonds payable xx
-issuance is more than face Accrual of Interest (year-end):
Cash xx Interest Expense xx
Discount on bonds payable xx Accrued Interest Payable xx
Bonds payable xx
-issuance is less than face Reversal of Accrued Interest: (optional)
Accrued Interest Payable xx
Interest Expense xx
Amortization of Discount/Premium: Presentation:

Interest Expense xx Non-Current Liabilities:


Discount on Bonds payable xx
-amortization of discount Bonds payable xxx
Discount on BP (xx)
Premium on Bonds payable xx Carrying amount xx
Interest Expense xx
-amortization of premium Or

Bond Retirement: Bonds payable xxx


Discount on BP xx
Bond payable xx Carrying amount xx
Cash xx
Bond issue cost
Retirement prior to maturity: Addition in Discount on BP
Deduction in Premium on BP
Bond payable xx
Interest Expense x
Disc. On Bonds payable xx
Cash xx
Gain on early retirement of bp xx
BONDS AMORTIZATION
1. STRAIGHT LINE METHOD – This procedure is simply to divide the amount
of bond premium or bond discount by the life of the bonds to arrive at
the periodic amortization

Example:
Bond payable P1M
Premium on BP 100k
Term 5 years

Amortization = 100k / 5 = 20,000 pesos per year


BONDS AMORTIZATION
2. BOND OUTSTANDING METHOD – It is based on the theory that
interest expense shall decrease every year by reason pf the decreasing
principal bond liability
Year Bonds outstanding Fraction Amortization
1 1,000,000 1M/3M 33,333
2 800,000 800K/3M 26,667
3 600,000 600K/3M 20,000
4 400,000 400K/3M 13,333
5 200,000 200K/3M 6,667
TOTAL 3,000,000 100,000
BONDS AMORTIZATION
3. EFFECTIVE INTEREST METHOD – This method distinguish two kinds of
interest rate namely the nominal rate and effective rate
*allowed by standard
Interest expense
Carrying amount x Effective rate

Interest paid
Face value x Nominal rate
ILLUSTRATION: Mar Company was authorized to issue P5M of 12% face value
bonds on April 1, 2015. Interest on the bonds is payable semiannually on April 1
and October 1. Bonds mature on April 1, 2020

The entire issue was sold on April 1, 2015 at 98 less bond issue cost of P50k. On
July 1, 2016 bonds of P2M face value were purchased and retired at 99 plus
accrued interest.

Required:
1. Prepare journal entries including any adjustments relating to the issuance of
the bonds for 2015 and 2016.
use memorandum approach and the straight line method of amortization
2. Present the bond payable in the statement of financial position on December
31, 2016
ILLUSTRATION: W Company issued P8M 12% bonds on December 31, 2015 at 96.
Interest is payable annually on December 31.
The bonds mature as follows:
December 31
2017 1,000,000
2018 1,000,000
2019 1,000,000
2020 1,000,000
2021 2,000,000
2022 2,000,000

Required:
1. Prepare a schedule showing the annual amortization of the bond discount
using the bond outstanding method
2. Prepare journal entries from 2015 to 2018
ILLUSTRATION: Yell Company received permission on January 1, 2015 to issue 12%
bonds of P6,000,000 maturing on January 1, 2025.

Interest is payable annually on Dec. 31. The bonds are callable at 102 plus
accrued interest.
On January 1, 2015 the entity issued the bonds for P6,737,000 with an effective
yield of 10%

The fiscal year of the entity ends December 31. The effective interest
amortization is used.

Required:
1. Prepare journal entries relating to the bonds payable for 2015
2. Present the bonds payable on December 31, 2015.
ILLUSTRATION:D company issued bonds with face value of P6M on January 1,
2015. The nominal rate of 6% is payable annually on December 31. The bonds are
issued with an 8% effective yield. The bonds mature on every December 31 each
year at the rate of P2M for three years. The present value of 1 at 8% is as follows:
One period .9259
Two periods .8573
Three periods .7938

Required:
1. Determine the market price or issue price of the bonds
2. Prepare journal entries for 2015. The effective interest method of
amortization is used.
3. Determine the carrying amount of the bonds payable on Dec 31. 2015

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