Chapt 25 Bonds Payable

Chapt 25
BONDS PAYABLE
Learning Objectives
• State the initial and subsequent measurement of bonds p

ayable.
• Account for compound financial instruments.
• Explain the accounting for derecognition of liabilities.
• State the requirements for the offsetting of financial asset
s and financial liabilities.
• Apply fair value option of measuring bonds payable.
Definition
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 p
eriodic interest payment at a stated rate until the principal sum is pai
d.
Bonds payable
•Bonds are long-term debt instruments similar to term loan

s and notes except that they are usually offered to the public
and sold to many investors.
•Bond indenture is the contractual arrangement between th

e issuer and the bondholders. It contains restrictive covenan
ts intended to prevent the issuer from taking actions contrar
y to the interests of the bondholders.
Types of bonds
• As to maturity
1. Term bonds – bonds that mature on a single date.
2. Serial bonds – bonds that have series of maturity dates. These bond
s are payable in installments.
3. Extendible and Retractable bonds – bonds that have more than on
e maturity date permitting investors to choose the maturity dates that m
eet their needs.
a. Extendible bonds – bonds that give holders the right to extend th
e initial maturity to a longer maturity date.
b. Retractable bonds – bonds that give holders the right to advanc
e the return of principal to an earlier date than the original maturity.
Types of bonds (continuation)
• As to recording point of view and payment of interests

4. Registered bonds – bonds issued in the name of the holder (owner
). Interests are paid directly to the holder. When the holder sells regis
tered bonds, the bond certificate must be surrendered and a new cert
ificate is issued.
5. Coupon (bearer) bonds – bonds that can be freely transferred and

have a detachable coupon for each interest payment.
6. Zero-coupon bonds (strip bonds or deep-discount bonds) –

bonds that do not pay periodic interests. Principal and compounded i
nterests are due only at maturity date.
7. Income bonds – bonds that pay interest only if the issuer earns pro
fits.
8. Participating bonds – bonds that participate in excess earnings of

the issuer as defined in the indenture.
9. Indexed bonds (purchasing power bonds) – bonds that pay interest

that is indexed to a measure of general purchasing power.
10. Inflation-linked bonds (Treasury Inflation Protected Securities ‘

TIPS’) – bonds that provide protection against inflation in that the pr
incipal is increased by the change in inflation over a period.
• As to security and risk

11. Mortgage bonds – bonds secured by real property.
12. Collateral trust bonds – bonds secured by the issuer’s financial a
ssets or the issuer’s own equity instruments which are deposited and
held by a trustee for the bondholders.
13. Asset-backed securities – bonds based on underlying pools of as
sets.
14. Subordinated bonds (subordinated debentures) – bonds that nor
mally have a higher yield than secured bonds. They are subordinated
(inferior) to the claims of other general creditors, secured parties, an
d parties with priorities in bankruptcy.
15. Debenture bonds – long-term bonds not secured by specific prop

erty.
16. Junk bonds – bonds that are very high-risk, high-yield securities i
ssued to finance leveraged buyouts and mergers. They are issued by
troubled companies.
• As to right of redemption
17. Callable bonds – bonds that contain call provisions giving the issu
er thereof the right to redeem the bonds prior to their maturity date.
18. Convertible bonds – bonds that give the holder thereof the option
of exchanging the bonds for shares of stocks of the issuer.
• As to issuer
19. Corporate bonds – bonds issued by private companies.
20. Government Bonds – bonds issued by a government and backed

by its full faith and credit.
• As to currency
21. International bonds –
(a) Foreign bonds – bonds denominated in the currency of the na
tion in which they are sold.
(b) Euro bonds – bonds denominated in a currency other than tha
t of the nation where they are sold.
22. Foreign currency bonds - – bonds issued by a foreign entity in a domes
tic market. Foreign bonds are denominated in the domestic market’s curre
ncy and are regulated by the domestic market authorities.
• Examples of foreign bonds:
• Samurai bonds – yen-denominated bonds issued in Japan by a foreign entity.
• Kangaroo bonds or Matilda bonds – Australian dollar-denominated bonds issued in Au
stralia by a foreign entity.
• Maple bonds – Canadian dollar-denominated bonds issued in Canada by a foreign entit
y.
• Matador bonds – Euro-denominated bonds (Spain’s currency is Euro) issued in Spain b
y a foreign entity.
• Bulldog bonds – British pound-denominated bonds issued in the British market by a for
eign entity.
• Yankee bonds – US dollar-denominated bonds issued in the US market by a foreign enti
Accounting for bonds
•Bonds are accounted for in much the same way as notes

and loans payable. However, bonds normally are long-term,
bear interest, issued at a premium or discount, and entail tr
ansaction (issue) costs.
Bond premium and discount
Accounting for transaction costs
• Transaction costs on the issuance of bonds (bond issue costs) are i

ncluded in the carrying amount of the bonds and amortized using the
effective interest method.
• Transaction costs are deducted when determining the carrying amo

unt of the bonds payable.
Accounting for issuance of bonds
1. Memorandum approach
2. Journal entry method
Memorandum approach
On January 1, 2019, an entity is authorized to issue a 10-year, 12% bo
nds with face amount of P5,000,000, interest payable January 1
and July 1, consisting of 5,000 units of P1,000 face amount
To record the sale of the bond at face amount

Cash 5,000,000
Bonds payable 5,000,000
Accounting for issuance of bonds
Journal entry approach

To record the authorization of the bonds
Unissued bonds payable 5,000,000
Authorized bonds payable 5,000,000
To record the sale of the bonds at face amount

Cash 5,000,000
Unissued bonds payable 5,000,000
Issuance of bonds at a premium
An entity issued bonds with a face amount of P5,000,000 at 105.

Cash 5,250,000
Premium on bonds payable 250,000
If the bonds have a 10-year life and the straight-line method is used,
the amortization of the bond premium is

Interest expense (250,000/10 years) 25,000
Issuance of bonds at a discount
An entity issued bonds with a face amount of P5,000,000 at 95.

Cash 4,750,000
Discount on bonds payable 250,000
If the bonds have a 10-year life and the straight-line method is used,
the amortization of the bond premium is
Interest expense 25,000

Discount on bonds payable (250,000/10 years) 25,000
Presentation of discount and premium
Noncurrent liabilities:
Premium on bonds payable 250,000 5,250,000
Noncurrent liabilities:
Discount on bonds payable ( 250,000) 4,750,000
Recording interest on bonds
Accounting for interest expense on bonds requires recognition of two

items:
a.Payment of interest during the year
b.Accrual of interest at the end of the year
On March 1, 2019, an entity sold bonds with face amount of P5,000,

000 and 12% interest payable semiannually on March 1 and Septem
ber 1.
In as much as the bonds are sold on March 1, 2019, the first paymen
t of interest will be on September 1, 2019.
Recording interest on bonds
Journal entries
March 1 Interest expense 300,000
Cash 300,000
Sept 1 Interest expense 300,000

Cash 300,000
Dec 31 Interest expense 200,000

Accrued interest payable 200,000
Issuance of bonds on interest date
On June 1, 2019, 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.
Journal entries
2019
June 1 Cash (5M x 97%) 4,850,000

Cash 300,000

(150,000/5 years x 7/12)
31 Interest expense 50,000

2020
Jan 1 Accrued interest payable 50,000
June 1 Interest expense 300,000

Cash 300,000

Cash 300,000


If a statement of financial position is prepared on December 31, 2020, th

e accrued interest payable of P50,000 is classified as current liability. T
he bonds payable should be classified as noncurrent liability.

Discount on bonds payable ( 102,500)
Carrying amount 4,897,500
Issuance of bonds in between interest dates
• When bonds are issued in between interest dates, any accrued i

nterest prior to the issuance date is sold to the investor togethe
r with the bonds.
• Any accrued interest charged to an investor should not be incl
uded in the carrying amount of the bond but rather credited t
o interest expense or interest payable.
• Moreover, the net interest expense recognized during the p
eriod should represent only the post-issuance interest exp
ense.
Issuance of bonds between interest dates
On April 1, 2019, an entity issued bonds with face amount of P5,000,000

at P5,228,000 plus accrued interest.
The bonds are dated January 1, 2019, mature in 5 years and pay 12% i
nterest semiannually on January 1 and July 1.
To record the issue of the bonds on April1, 2019:

Cash 5,378,000
Issue price 5,228,000

Add: Accrued interest from Jan 1 – Apr 1, 2019
(5M x 12% x 3/12) 150,000
Total cash received 5,378,000
Jul 1 Interest expense (5M x 12% x ½) 300,000

Cash 300,000


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

Less: Expired life on the date of sale (Jan 1 to Apr 1) 3 months
Remaining life of bonds 57 months
Monthly amortization (228,000 / 57 months) 4,000
Amortization for 9 months from Apr 1 to Dec 31, 2019

(4,000 x 9) 36,000
Financial statement presentation

Dec. 31, 2019
Bonds payable, due January 1, 2024 5,000,000

Derecognition of a financial liability
•An entity shall remove a financial liability (or a part of a fin

ancial liability) from its statement of financial position when
it is extinguished such as when the obligation specified in
the contract is discharged or cancelled or expires.
Bond retirement on maturity date
An entity sold bonds with face amount of P5,000,000 on March 1, 2019

with 12% interest payable March 1 and September 1 and the bonds mat
ure on March 1, 2024.
Mar 1, 2024 Bonds payable 5,000,000

Sinking fund 5,300,000
If no sinking fund

Cash 5,300,000
Retirement of bonds prior to maturity
• Retirement of bonds, whether prior to maturity or at maturity and w

hether through refunding or nonrefunding, is treated as extinguish
ment of liability.
• The carrying amount of the bonds is updated for any discount o

r premium amortization up to the date of extinguishment and any dif
ference between the updated carrying amount and the reacquisitio
n price is recognized in profit or loss as gain or loss from exti
nguishment.
Bond retirement prior to maturity date
When bonds are reacquired prior to maturity date, they may be canceled and pe
rmanently retired, or held in the treasury for future reissue when the need for fun
d arises.
If the reacquired bonds are canceled and permanently retired, the following proc
edures are followed:
1.The bond premium or bond discount should be amortized up to the date of ret
irement.
2.The balance of the bond premium or bond discount should be determined. T
his balance is important because the amount related to the bonds retired is canc
eled.
3.The accrued interest to date of retirement should be determined.
4.The total cash payment should be computed. This is equal to the retirement
price plus the accrued interest. The retirement price is a certain percent of the f
ace amount of the bonds.
5. The carrying amount of the bonds retired is determined. The face amount of
the bonds plus the unamortized premium or minus the unamortized discount
gives the carrying amount of the bonds.
6. The gain or loss on the retirement of the bonds is computed.
7. The retirement of the bonds is then recorded by canceling the bond liability t
ogether with the unamortized premium or discount. Any accrued interest is d
ebited to interest expense.
Example
On March 1, 2019, bonds with face amount of P5,000,000 are issued for P4,730
,000.
The bonds are dated March 1, 2019 and mature in 5 years, and pay 12% interes
t semiannually on March 1 and September 1.
The straight-line method of amortization is used for simplicity.
All of the bonds are retired on July 1, 2022 at 97.

1. The amortization of the bond discount is recorded up to July 1, 2022. If the e

ntity uses the calendar period, the last amortization was on December 31, 20
21.
Thus, an amortization of the discount for 6 months from January 1 to July 1, 20
22 should be recorded.

(270,000/5 years = 54,000 annual amort.)
(54,000 x ½ = 27,000)
2. Balance of the discount on bonds payable

Discount on bonds payable – March 1, 2019 270,000
Less: Amortization from March 1, 2019 to July 1, 2022
(40 months /60 x 270,000) 180,000
Balance, July 1, 2022 90,000
3. The accrued interest on the date of retirement, July 1, 2022 is computed as

P5,000,000 x 12% x 4/12 = P200,000).
The last payment of interest was March 1, 2022. Thus, the accrued interest
is for four months, from March 1 to July 1, 2022.
4. Total cash payment

Retirement price (5M x .97) 4,850,000
Add: Accrued interest 200,000
Total cash payment 5,050,000
5. Carrying amount of the bonds payable

Carrying amount on July 1, 2022 4,910,000
 Gain on the early retirement or extinguishment

Carrying amount of the bonds payable 4,910,000
Less: Retirement price (4,850,000)
Gain on early retirement 60,000
7. To record the retirement of the bonds on July 1, 2022

Cash 5,050,000
Gain on early retirement of bonds 60,000
Suppose in the preceding example, not all the bonds are retired on July 1, 2022
?
Suppose only bonds with face value amount of P1,000,000 are retired at 97?
The amortization of discount is updated on July 1, 2022.

On July 1, 2022, after recording the discount amortization, the discount on the b
onds payable will have an adjusted debit balance of P90,000.
a. Total cash payment

Retirement price (P1M x 97) 970,000
Add: Accrued interest on P1M from March 1 to
July 1, 2022 (P1M x 12% x 4/12) 40,000
b. Carrying amount of bonds retired and gain on retirement

Bonds payable retired 1,000,000
Discount on bonds payable applicable to the
bond retired (1M/5M x 90,000) ( 18,000)
Carrying amount – July 1, 2022 982,000
Less: Retirement price 970,000
Gain on early retirement on bonds 12,000
Entry to record the retirement of P1M bonds

Cash 1,010,000
Gain on early retirement of bonds 12,000
Remaining journal entries for 2022:
Sept 1 Interest expense 240,000

Cash (4M x 12% x ½ ) 240,000

Accrued interest payable (4M 12% x 4/12) 160,000

(amortization for six months)
Treasury bonds
•Treasury bonds are an entity’s own bonds which were origi

nally issued but subsequently reacquired but not cancelled.
Treasury bonds are presented in the financial statements as
a deduction from bonds payable issued to arrive at the carry
ing amount of bonds payable outstanding.
Treasury bonds
An entity originally issued bonds with face amount of P5,000,000 at 105. Subse
quently, the entity reacquired P1,000,000 face amount to be placed in the treasu
ry for 103.
At the time of the reacquisition, the unamortized premium balance is P200,000,

and accrued interest on the treasury bonds is P30,000 which is paid in cash.
To record the acquisition of the treasury bonds
Treasury bonds 1,000,000

Cash 1, 060,000]
Gain on acquisition of treasury bonds 10,000
Treasury bonds
Face amount of treasury bonds 1,000,000

Applicable premium (1M/5M x 200,000) 40,000
Less: Reacquisition price (1M x 103) 1,030,000
Gain on acquisition of treasury bonds 10,000
Reacquisition price 1,030,000

Accrued interest on bonds 30,000
Subsequent sale
Reissuance at a premium
The treasury bonds are issued for P1,200,000.
Cash 1,200,000
Treasury bonds
Reissuance at a discount
The treasury bonds are reissued for P900,000.
Cash 900,000
When treasury bonds are not subsequently sold, the account is cancelled on the
date of maturity.

Treasury bonds
Statement presentation

Treasury bonds (1,000,000)
Bonds payable issued and outstanding 4,000,000
Bond refunding
•Bond refunding refers to the issuance of new bonds (norm

ally with lower interest rate), the proceeds from which is use
d to retire existing outstanding bonds.
•Bond refunding is treated as an extinguishment of the o

utstanding bonds.
Bond refunding
Example
1.Issuance of new 10-year 10% bonds, with face amount of P1,500,000, for P1,
600,000.
2.Refunding of old 12% bonds, with remaining life of 4 years, at 102.
Bonds payable – old 1,000,000
Retirement price (1,000,000 x 102) 1,020,000
Journal entries
1.To record the issuance of the new bonds payable.

Cash 1,600,000
Bond refunding
2. To record the retirement of the old bonds payable

Loss on extinguishment of bonds 50,000
Cash 1,020,000
The loss on extinguishment of bonds is represented by the refunding charges of

P50,000.
Unamortized discount 30,000

Redemption premium (1M x 2%) 20,000
Total refunding charges 50,000
or
Carrying amount 970,000
Less: Retirement price 1,020,000
Loss on extinguishment ( 50,000)
Amortization of Bond discount or premium
Amortization of Bond discount or premium
a.Straight – line
b.Bond outstanding method
c.Effective interest method
PFRS 9 requires the use of the effective interest method in amortizing discount,
premium and bond issue cost.
Premature retirement of serial bonds
Accounting year and bond year coincide
Bonds with a face amount of P5,000,000 are issued and mature at the rate of P
1,000,000 every year for 5 years.
Face amount of bonds 5,000,000

Date of bonds January 1, 2019
Date of issue January 1, 2019
Interest rate 12%
Semiannual interest dates June 30 and December 31
Assume serial bonds with face amount of P1,000,000 scheduled to be retired on

December 31, 2021, are retired at 103 on December 31, 2019, two years prior t
o their redemption date.
Accounting procedures
1.Get the ratio of the total premium or discount to the common denominator of t
he fractions developed, total of bond outstanding column. This ratio represents
the amortization rate per year.
300,000/15,000,000 = .02 rate per year.
2.Multiply the rate computed in (1) by the face amount of bonds retired.The an
swer gives the unamortized premium or discount per year related to the bonds r
etired.
P1,000,000 x .02 = P20,000 unamortized premium per year
3.Multiply the unamortized premium or discount per year computed in (2) by the
period from date of retirement to the scheduled maturity date of the retired bond
s.
the answer is the unamortized premium or discount applicable to the bonds r

etired which should be canceled.
P20,000 x 2 years = P40,000 unamortized premium related to the P1M

face value bonds retired.
12/31/19 to record the retirement of P1M

Cash (1m X 103) 1.030,000
Gain on early extinguishment 10,000
Revised Schedule of premium amortization

Year Original Premium Revised premium
amortization canceled amortization
2019 100,000 100,000
2020 80,000 20,000* 60,000
2021 60,000 20,000** 40,000
2022 40,000 40,000
2023 20,000 20,000
300,000 40,000 260,000
* for 2020 ** for 2021
Accounting year and bond year do not coincide
Face amount of the bonds 5,000,000

Date of issue April 1, 2019
Date of bonds April 1, 2019
Interest rate 12%
Semiannual interest payment dates April 1 and October 1
The bonds mature on Aril 1, of each year at the rate of P1,000,000.

Amortization table
Bond year Bond Discount

From To outstanding Fraction amortization
April 1, 2019 March 31, 2020 Discount
5,000,000 5/15 100,000
April 1, 2020 March 31, 2021 4,000,000 4/15 80,000
April 1, 2021 March 31, 2022 3,000,000 3/15 60,000
April 1, 2022 March 31, 2023 2,000,000 2/15 40,000
April 1, 2023 March 31, 2024 1,000,000 1/15 20,000
15,000,000 300,000
The amortization table every accounting year may be prepared as follows:

2019 April 1 to Dec 31 100,000 x 9/12 = 75,000
2020 Jan 1 to Mar 31 100,000 x 3/12 = 25,000
Apr 1 to Dec 31 80,000 x 9/12 = 60,000 85,000
2021 Jan 1 to Mar 31 80,000 x 3/12 = 20,000

Apr 1 to Dec 31 60,000 x 9/12 = 45,000 65,000
2022 Jan 1 to Mar 31 60,000 x 3/12 = 15,000

Apr 1 to Dec. 31 40,000 x 9/12 = 30,000 45,000
2023 Jan 1 to Mar 31 40,000 x 3/12 = 10,000

Apr 1 to Dec 31 20,000 x 9/12 = 15,000 25,000
2024 Jan 1 to Mar 31 20,000 x 3/12 = 5,000

300,000
Journal entries
2019
Apr 1 Cash 4,700,000
Oct 1 Interest expense 300,000

Cash 300,000
(semiannual interest payment (5M x 12% x ½)

Interest accrued for 3 months (5M x 12% x 3/12)

amortization of discount for 2019.
Fair value option of measuring bonds payabl
e
PFRS 9 provides that at initial recognition, bonds payable may be irrevocably d
esignated as at fair value through profit or loss.
Example
On January 1, 2019, an entity issued bonds with face amount of P5,000,000 an

d 12% stated interest rate for P5,379,100. The bonds are sold to yield 10%. Int
erest is payable annually on December 31. The entity paid bond issue cost of P
100,000. On December 31, 2019, the fair value of the bonds is determined to b
e P5,300,000.
The entity elected the fair value option of measuring the bonds payable.
e
Journal entries for 2019
Jan 1 Cash 5,379,100

1 Transaction cost 100,000

Cash 100,000

Cash (12% x 5M) 600,000
31 Bonds payable 79,100

Gain from change in fair value 79,100
Bonds payable – Jan1, 2019 5,379,100

Fair value – Dec. 31, 2019 5,300,000
Decrease in fair value of bonds payable – gain 79,100
e
Change in fair value recognized in OCI
Example
On January 1, 2019, an entity issued bonds payable with face amount of P5,000
,000 and 10% stated interest rate for P4,800,000.
The bonds have a 5-year term and interest is payable annually every December
31.
The entity elected the fair value option in measuring the bonds payable.
On Dec. 31, 2019, the fair value of the bonds is P5,500,000.
It is reliably determined that the fair value increase of P700,000 comprised P200
,000 attributable to credit risk and P500,000 attributable to change in the market
interest rate.
e
Jan 1 Cash 4,800,000


Cash (10% x 5M) 500,000
31 Loss on credit risk – OCI 200,000

Loss from change in fair value 500,000
Bonds payable 700,000
Effective Interest Method
Under the effective interest method, the effective interest expense is det
ermined by multiplying the effective rate by the carrying amount of the b
onds.
The carrying amount of the bond changes every year as the amount of p
remium or discount is amortized periodically.
The effective interest is then compared with the nominal interest. The di
fference is the premium or discount amortization.
The premium amortization is computed as follows:

Nominal interest (nominal rate x face amount) XXX
Less: Effective interest (effective rate x carrying amount) XXX
Premium amortization XXX
The discount amortization is computed as follows:

Effective interest XXX
Less: Nominal interest XXX
Discount amortization XXX
Effective amortization of discount
On January 1, 2019, an entity issued 2-year 8% bonds with face amount

of P1,00,000 for P964,540 which will yield a 10% effective interest per y
ear. Interest is payable semiannually on June 30 and December 31.
Schedule of amortization
Date Interest paid Interest expense Amortization Carrying amount
1/1/19 964,540
6/30/19 40,000 48,227 8,227 972,767
12/31/19 40,000 48,638 8,638 981,405
6/30/20 40,000 49,070 9,070 990,475
12/31/20 40,000 49,525 9,525 1,000,000
Interest paid
Face amount times semiannual nominal rate of 4% or P40,000.
Interest expense
Carrying amount times semiannual effective rate. Thus, for January 1, to

June 30, 2019, the interest expense is P964,540 tines 5% or P48,227.
Carrying amount
Preceding carrying amount plus the discount amortization. Thus, on Ju

ne 30,2019, the carrying amount of P964,540 plus P8,227 or P972,227.
The carrying amount is actually the amortized cost contemplated in the
standard.
Journal entries:
2019
Jan 1 Cash 964,540
June 30 Interest expense 48,227

Cash 40,000

Cash 40,000
Effective amortization of premium
On January 1, 2019, an entity issued 3-year 12% bonds with face amou
nt of P1,00,000 for P1,049,740 which will yield a 10% effective interest p
er year. Interest is payable annually every December 31.
Schedule of amortization
1/1/19 1,049,740
12/31/19 120,000 104,974 15,026 1,034,714
12/31/20 120,000 103,471 16,529 1.018,185
12/31/21 120,000 101,815 18,185 1,000,000
Interest paid
Face amount of P1,000,000 times the nominal rate of 12% or P120,000.

Interest expense
Carrying amount times the annual effective rate. Thus, for 2019, the int
erest expense is P1,049,740 times 10% of P104,974.
Premium amortization
Interest paid minus interest expense. Thus, for 2019, the premium amor
tization is P120,000 minus P104,974 or P15,026.
Carrying amount
Preceding carrying amount minus the premium amortization, Thus, on D

ecember 31, 2019, the carrying amount is P1,049,740 minus P15,026 or
P1,034,714.
Jan 1 Cash 1,049,740


Cash 120,000
Market price or Issue price of bonds
• The issuer may want to estimate the issue price of a bond

under a specified current market rate. The estimated issu
e price is simply computed as the present value of the fut
ure cash flows of the bonds discounted at a specified effe
ctive interest rate.
Market price or issue price is equal to the sum of the foll
owing:
1. Present value of bonds payable
2. Present value of the total interest payments
Example
Nominal rate 6%
Effective rate 8%
The bonds are issued on January 1, 2019 and mature in four years on Ja
nuary 1, 2023. The interest is payable annually every December 31.
Computation of the present value of the bonds
Present value of principal (4,000,000 x .7350) 2,940,000

Present value of annual interest payments
(240,000 x 3.3121) 794,904
Total present value 3,734,904
Face amount 4,000,000

Market price or issue price 3,734,904
Table of amortization
1/1/19 3,734,904
12/31/19 240,000 298,792 58,792 3,793,696
12/31/20 240,000 303,496 63,496 3,857,192
12/31/21 240,000 314,233 74,233 4,000,000
Example
Nominal rate 12%
Effective rate 10%
The bonds are issued on January 1, 2019 and mature in three years on J
anuary 1, 2022. The interest is payable semiannually every December 3
1.
Present value of principal (5M x .7462) 3,731,000

Present value of interest payments (300,000 x 5.0757) 1,522,710
Market price or issue price of bonds 5,253,710

1/1/19 5,253,710
6/30/19 300,000 262,686 37,314 5,216,396
12/31/19 300,000 260,820 39,180 5,177,216
6/30/20 300,000 258,861 41,139 5,136,077
12/31/20 300,000 256,804 43,196 5,092,881
6/30/21 300,000 254,644 45,356 5,047,525
12/31/21 300,000 252,475 47,525 5,000,000
Example – serial bonds
Nominal rate 12%
Effective rate 10%
Date of issue January 1, 2019
Annual payment every December 31 1,000,000
Interest is payable annually December 31
Present value of the bonds payable

Principal Interest Total PV Present
Date payment payment payment factor value
12/31/19 1,000,000 360,000 1,360,000 .9091 1,236,376
12/31/20 1,000,000 240,000 1,240,000 .8264 1,024,736
12/31/21 1,000,000 120,000 1,120,000 .7513 841,456
Interest payment
Dec 31, 2019 (3M x 12%) 360,000

Dec 31, 2020 (2M x 12%) 240,000
Dec 31, 2021 (1M x 12%) 120,000
Interest Interest Premium Principal Carrying
Date paid expense amort payment amount
1/1/19 3,102,568
12/31/19 360,000 310,257 49,743 1,000,000 2,052,825
12/31/20 240,000 205,282 34,718 1,000,000 1,018,107
12/31/21 120,000 101,893 18,107 1,000,000 -
Dec 31, 2019
Interest paid (3M x 12%) 360,000

Interest expense (3,102,568 x 10%) 310,257
Premium amortization for 2019 49,743
Carrying amount – January 1, 2019 3,102,568

Premium amortization for 2019 ( 49,743)
Principal payment on December 31, 2019 (1,000,000)
Carrying amount – December 31, 2019 2,052,825
Dec 31, 2020
Interest paid (2,000,000 x 12%) 240,000

Interest expense (2,052,825 x 10%) 205,282
Carrying amount – Dec 31, 2019 2,052,825
Premium amortization for 2020 ( 34,718)
Principal payment on Dec 31, 2020 (1,000,000)
December 31, 2021
Interest paid (1,000,000 x 12%) 120,000

10% x P1,018,107 equals P101,811.
Journal entries:
1.Issuance of bonds
Cash 3,102,568
2. Payment of interest
Cash 360,000
3. Amortization of premium
4. Payment of principal
Cash 1,000,000
Effective interest method – Bond issue cost
PFRS 9 provides that transaction costs that are directly attributable to t

he issue of a financial liability shall be included in the initial measure
ment of the financial liability.
Transaction costs include bond issue costs.
Thus, bond issue costs will increase discount on bonds payable and wil
l decrease premium on bonds payable.
Example – Discount and bond issue cost

On January 1, 2019, an entity issued 3-year bonds with face amount of P
10,000,000 and 9% stated rate. The bonds mature on January 1, 2022 a
nd interest is payable annually on December 31.
The bonds are issued at P9,751,210 with an effective yield of 10% before
considering the bond issue cost. Entity paid P239,880 bond issue cost.
Bond issue cost ( 239,880)
Net proceeds 9,511,330
Journal entries
1.To record the issuance of the bonds

Cash 9,511,330
2.To record the annual interest expense

Interest expense (10M x 9%) 900,000
Cash 900,000
3. To record the amortization of the discount on bonds payable
Interest expense (9,511,330 x 11%) 1,046,246

Interest paid (10,000,000 x 9%) 900,000
Amortization of discount on bonds payable 146,246
Discount and issue cost
Example – Discount and bond issue cost

10,000,000 at 95. The nominal rate is 10% and the interest is payable a
nnually on December 31. The bonds mature on January 1, 2024.
Entity paid P200,000 bond issue cost.

Issue price (10M x 95%) 9,500,000
By means of interpolation, the effective rate is 11.94%.

if 11% = 9,630,000; 12% = 9,278,800
9,300,000 – 9,630,000/9,278,000 – 9,630,000 = .94
Example – Premium and bond issue cost

10,000,000 at 105. The nominal rate is 10% and the interest is payable a
nnually on December 31. The bonds mature on January 1, 2024.
Entity paid P200,000 bond issue cost.

Issue price (10M x 105%) 10,500,000
Cash 10,300,000
Effective rate is 9.23% (10,300,000-10,388,700/10,000,000-10,388,700)

Compound financial instruments
•A compound financial instrument is a financial instrument

that, from the issuer’s perspective, contains both a liabilit
y and an equity element. These elements are classified
and accounted for separately.
•The most common examples of compound financial instru

ments are:
a. Bonds payable issued with share warrants
b. Convertible bonds payable
Accounting for compound financial instrume
nts
Bonds payable issued with share warrants
The bonds are assigned an amount equal to the “market value of the bo
nds ex-warrants”, regardless of the market value of the warrants. The r
esidual amount or remainder of the issue price shall then be allocated to
the warrants.
Example:
An entity issued 5,000 10-year bonds, face amount P1,000 per bond, at
105. Each bond is accompanied by one warrant that permits the bondho
lder to purchase 20 equity shares, par P50, at P55 per share, or a total
of 100,000 shares, 5,000 x 20.
The market value of the bond ex-warrant at the time of issuance is 98.
Journal entries:
1.To record the issuance of the bonds

Cash (5,000,000 x 105) 5,250,000
Share warrants outstanding 350,000
Issue price of bonds with warrants 5,250,000

Market value of bonds ex-warrants
(5,000,000 x 98) 4,900,000
Residual amount allocated to warrants 350,000
Journal entries:
2.To record the exercise of 60% of the warrants.
Cash (60,000 shares x 55) 3,300,000

Share warrants outstanding
(60% x 350,000) 210,000
Share capital (60,000 shares x 50) 3,000,000
Share premium 510,000
3.To record the expiration of the remaining warrants.

Share premium – unexercised warrants 140,000
Market value of bonds ex-warrants unknown
In such a case, the amount allocated to the bond is equal to the present
value of the principal bond liability plus the present value of the future in
terest payments using the effective or market rate for similar bonds with
out the warrants.
Example
An entity issued 5,000 10-year bonds, face amount P1,000 per bond, at
105. Each bond is accompanied by one warrant that permits the bondho
lder to purchase 20 equity shares, par P50, at P55 per share, or a total
of 100,000 shares, 5,000 x 20. Interest is payable annually at a rate of 1
0% per annum. When the bonds are issued, the prevailing market rate f
or similar bonds without warrants is 12% per annum.
The present value of the bonds payable is computed as follows:

Present value of the principal (5M x 0.322) 1,610,000
Present value of the interest payments
(10% x 5M = 500,000 x 5.65) 2,825,000
Issue price of the bonds with warrants 5,250,000

Present value of bonds payable (4,435,000)
Residual amount allocated to warrants 815,000
Journal entry to record the issuance of the bonds

Cash 5,250,000
Convertible bonds
When convertible bonds are issued at a premium or discount, amortizati

on period is up to the maturity date instead of the conversion date becau
se it is impossible to predict, if at all, that the conversion privilege will be
exercised.
Accounting problems arise in two situations, namely:

a.When the convertible bonds are originally issued;
b.When the convertible bonds are converted.
The economic effect of issuing convertible bonds is substantially the sa

me with issuing simultaneously bonds payable with share warrants.
Original issuance
Example
An entity issued 5,000, 5-year bonds, face amount P1,000 each at 105.
The bonds contain a conversion privilege that provides for an exchange
of a P1,000 bonds for 20 equity shares with par value of P50.
It is reliably determined that the bonds would sell only at 98 without the
conversion privilege.
Total issue price 5,250,000

Issue price of bonds without conversion
privilege (5M x 98%) (4,900,000)
Residual amount allocated to conversion privilege 350,000

Allocated issue price 4,900,000
Journal entry
Cash (5M x 105%) 5,250,000

Share premium – conversion privilege 350,000
Market value of the bonds unknown
Using the preceding example, assume that the interest on the bonds is
payable semiannually at a nominal rate of 8% per annum. When the bon
ds are issued, the prevailing market rate for similar bonds without conve
rsion privilege is 10% per annum.
Present value of the convertible bonds is computed as follows:

Present value of principal (5M x 0.6139) 3,069,500
Present value of semiannual interest payment
(5M x 4% = 200,000 x 7.72) 1,544,000
Issue price of the bonds with conversion privilege 5,250,000

Present value of the bonds 4,613,500
Residual amount allocated to conversion privilege 636,500
Conversion of bonds
The carrying amount of the bonds is the measure of the share capital iss
ued because this is the “effective price” for the shares issued as a result
of conversion.
PAS 32 provides that there is no gain or loss on conversion at maturity b

ecause the convertible bond is viewed in substance as an equity and th
e conversion is really an exchange of one type of equity capital for anoth
er.
Any cost incurred in connection with the bond conversion shall be deduc
ted from share premium or debited to “share issue cost”.
The carrying amount of the bond is equal to the face amount plus accru
ed interest if not paid, plus unamortized premium or minus unamortized
discount and bond issue cost.
Accounting procedures
a.The amortization of discount and issue cost or premium up to the date

of conversion shall be recorded.
b.The face amount of the bonds converted shall be canceled together wi
th the related unamortized premium or discount and issue cost.
If only portion of the bonds is converted, the unamortized premium

or discount and issue cost balance shall be canceled proportionately.
c.Normally, conversion is at the interest date. When at other dates, the a
ccrued interest up to the date of conversion is ordinarily paid.
If the interest is not paid, it is added to the face amount of the bonds con
verted to get the carrying amount of the bonds for conversion purposes.
The accrued interest is charged to interest expense.
Example
The balance sheet showed the following balances at year-end:

Bonds payable – 12% convertible 5,000,000
Share capital, P40 par, 400,000 shares authorized
and 250,000 shares issued 10,000,000
Share premium – issuance 3,000,000
On the same date, the bonds are converted into share capital. The conversion r
atio is 20 shares for each P1,000 bond or a total of 100,000 shares.
Cost incurred in connection with the conversion amounted to P100,000. The ac

crued interest on the bonds payable on the date conversion is P150,000 which
was paid in cash.
Total consideration 5,700,000
Par value of share capital issued
(100,000 shares x 40) 4,000,000
Share premium 1,700,000
Journal entry for the conversion

Share capital 4,000,000
Share premium – issuance 1,700,000
Cash 150,000
Share premium – issuance 100,000

Cash 100,000
Payment of convertible bonds at maturity
On December 31, 2019, the statement of financial position showed the following
balances before payment:
Bonds payable – due December 31, 2019 5,000,000

Share premium-issuance 4,000,000
Share premium-conversion option 400,000
The bonds are convertible and originally issued on January 1, 2010. The stated i
nterest rate is 10% payable annually every December 31. The original issue pri
ce of the convertible bonds was P6,000,000 allocated as follows:
Original price 6,000,000

Issue price of bonds without conversion option (5,600,000)
Issue price of bonds without conversion option 5,600,000
Face amount of the bonds 5,000,000
Since the bonds already matured, the premium on bonds payable is alre
ady fully amortized on December 31, 2019.
The convertible bonds are not converted but fully paid on December 31,
2019.
1. To record the payment on December 31, 2019.

Interest expense (10% x 5M) 500,000
Cash 5,500,000
2.To close the share premium from conversion privilege

Share premium – issuance 400,000
Payment of convertible bonds before maturity
On December 31, 2019, the entity showed the following balances:
Bonds payable – 8% convertible, due December 31, 2024 5,000,000

Share premium-issuance 1,000,000
The interest is payable annually every December 31. The convertible bonds are
not converted but fully paid on December 31, 2019.
On December 31, 2019, the quoted price of the convertible bonds with conversi
on privilege is 108 which is the payment to the bondholders plus interest. Howe
ver, the quoted price of the bonds without the conversion privilege is 103.
Fair value of bonds with conversion privilege (5M x 108) 5,400,000

Fair value of the bonds without conversion privilege
(5M x 103) 5,150,000
Fair value of equity component 250,000

Payment equal to the fair value of the bonds
without conversion privilege (5,150,000)
Gain on extinguishment 150,000
Journal entries:
1.To record the payment before maturity

Share premium-conversion privilege 250,000
Cash 5,400,000

Cash 400,000
2.To close the remaining balance of the share premium from conversion
privilege
Share premium-conversion privilege 350,000

Share premium – issuance (600T-250T) 350,000
Reclassification
•An entity shall not reclassify any financial liability.

Debt Restructuring
Debt restructuring is a situation where the creditor, for economic or l

egal reasons related to the debtor’s financial difficulties, grants to the
debtor concession that would not otherwise be granted in a normal b
usiness relationship.
Types of debt restructuring

1.Asset swap
2.Equity swap
3.Modification of terms
Transfer of noncash assets (Asset swap)
•When an obligation is settled by transferring noncash asset

s to the creditor, the difference between the carrying amo
unt of the financial liability extinguished and the carryin
g amount of the noncash asset transferred is recognized i
n profit or loss.
Example
An entity provided the following balances at year-end:
Note payable 2,000,000

At year-end, the entity transferred to the creditor land with carrying amo
unt of P1,500,000 and fair value of P2,200,000.
Computation:
Total liability 2,400,000
Less: Carrying amount of land 1,500,000
Gain on extinguishment of debt 900,000
Journal entry
Notes payable 2,000,000

Land 1,500,000
Dacion en pago accounting
This arises when a mortgaged property is offered by the debtor in full se

ttlement of the debt.
The transaction shall be accounted for as an “asset swap” form of debt r

estructuring. This requires recognition of gain or loss based on the bala
nce of the obligation including accrued interest and other charges.
Example
Land costing P500,000 and building costing P4,000,000 with accumulated depr
eciation of P800,000 were mortgaged to secure a bank loan of P3,000,000.
Face amount of the loan 3,000,000
Legal fee and bank service charges 50,000
Subsequently, the land and the building were given to the bank in full payment o
f the liability.
Total liability 3,250,000
Less: Carrying amount of land and building
(500,000 + 3,200,000) 3,700,000
Loss on extinguishment of debt ( 450,000)
Journal entry
Mortgage payable 3,000,000

Bank service charges 50,000
Loss on extinguishment of debt 400,000
Accumulated depreciation 800,000
Land 500,000
Building 4,000,000
Transfer of equity securities (Equity swap)
• The difference between the carrying amount of the financ

ial liability extinguished and the consideration paid (i.e., f
air value of equity instrument or fair value of financia
l liability extinguished, whichever is more clearly determi
nable) is recognized in profit or loss.
• Order of priority:
a. Fair value of the equity instrument issued
b. Fair value of the liability extinguished
c. Carrying amount of the liability extinguished
Example
An entity showed the following data at year-end:

The entity issued share capital with a total par value of P2,000,000 and
fair value of P4,500,000 in full settlement of the bonds payable and accr
ued interest.
On the other hand, the fair value of the bonds payable is P4,700,000.
Fair value of the shares issued is used

Gain on extinguishment of debt 1,000,000
Fair value of shares issued 4,500,000

Par value of shares issued 2,000,000

Fair value of shares issued (4,500,000)
Gain on extinguishment 1,000,000
Fair value of the bonds payable is used

Fair value of bonds payable 4,700,000

Par value of shares issued 2,000,000

Fair value of the bonds payable (4,700,000)
Carrying amount of the bonds payable is used


Par value of the shares issued (2,000,000)
Gain on extinguishment 3,500,000
Modification of terms
• A substantial modification of the terms of an existing financial liabili
ty (whether or not attributable to the financial difficulty of the debtor
) shall be accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability.
• The terms are substantially different if the present value of the c
ash flows under the new terms, discounted using the original effectiv
e interest rate, is at least 10% different from the carrying amount
of the original financial liability.
• The difference between the carrying amount of the old liability and th
e present value of the new liability shall be accounted for as gain or lo
ss on extinguishment. The old effective rate is used in computing the
present value of the new liability.
Example – Modification of terms
On January 1, 2019, an entity showed the following:
Note payable-due January 1, 2019-14% 5,000,000
Accrued interest payable 1,000,000
The entity is granted by the creditor the following concessions on Janua

ry 1, 2019:
a.The accrued interest of P1,000,000 is forgiven.

b.The principal obligation is reduced to P4,000,000.
c.The new interest rate is 10% payable every December 31.
d.The new date of maturity is December 31, 2022.
Computation
PV of principal (4,000,000 x 0.5921) 2,368,400

PV of interest payments (400,000 x 2.9137) 1,165,480
Present value of new note payable 3,533,880
Face value of new note payable 4,000,000
Discount on note payable 466,120
Note payable – old 5,000,000

Carrying amount of old liability 6,000,000
Journal entries
1.To record the extinguishment of the old note payable

Note payable – old 5,000,000
Note payable – new 4,000,000
2.To record the interest payment on the new note payable for 2019.
Cash 400,000
3.To amortize the discount on note payable for 2019.

1/1/19 3,533,880
12/31/19 400,000 494,743 94,743 3,628,623
12/31/20 400,000 508,007 108,007 3,736,630
12/31/21 400,000 523,128 123,128 3,859,758
12/31/22 400,000 540,242 140,242 4,000,000
December 31, 2019

Interest paid (10% x 4,000,000) 400,000
Interest expense (14% x 3,533,880) 494,743
Discount amortization 94,743
Carrying amount – January 1, 2019 3,533,880
December 31, 2020
Interest paid 400,000

Interest expense (14% x 3,628,623) 508,007
Discount amortization 108,007
Books of the creditor
Jan 1 Note receivable – new 4,000,000

Loss on debt restructure 2,466,120
Note receivable – old 5,000,000
Accrued interest receivable 1,000,000
Unearned interest income 466,120
Dec 31 Cash 400,000

Interest income 400,000
Dec 31 Unearned interest income 94,743

interest income 94,743
No substantial modification
Example
On January 1, 2019, an entity showed the following:
Note payable-due January 1, 2019-10% 5,000,000
The entity is granted by the creditor the following concessions on Janua

ry 1, 2019:
a.The accrued interest of P1,000,000 is forgiven.

b.The interest rate is 14% payable every December 31.
c.The new date of maturity is December 31, 2021.
Carrying amount of the old liability 6,000,000
PV of principal (5,000,000 x 0.7513) 3,756,500

PV of interest payments (5,000,000 x 14% x 2.4869) 1,740830
Present value of new liability 5,497,330
Carrying amount of old liability 6,000,000

Gain on modification 502,670

Face amount of new note payable 5,000,000
Premium on new note payable 497,330
Journal entry
1.To record the modified liability on January 1, 2019

Premium on note payable 497,330
Gain on modification of terms 502,670
2.To record the annual interest payment for 2019.

Interest expense (5M x 14%) 700,000
Cash 700,000
3.To amortize the premium on note payable

Premium on note payable 150,267

1/1/19 5,497,330
12/31/19 700,000 549,733 150,267 5,347,063
12/31/20 700,000 534,706 165,294 5,181,769
12/31/21 700,000 518,231 181,769 5,000,000
Offsetting a financial asset and a financial lia
bility
•An entity shall offset a financial asset and a financial liability and the n
et amount presented in the statement of financial position only when th
e entity
1. currently has a legally enforceable right to set off the recognized a
mounts; AND
2. intends either to settle on a net basis, or to realize the asset and settle th
e liability simultaneously.

Chapt 25 Bonds Payable

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Chapt 25 Bonds Payable

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Chapt 25

• State the initial and subsequent measurement of bonds p

A bond is a formal unconditional promise, made under seal, to pay a

•Bonds are long-term debt instruments similar to term loan

•Bond indenture is the contractual arrangement between th

• As to recording point of view and payment of interests

5. Coupon (bearer) bonds – bonds that can be freely transferred and

6. Zero-coupon bonds (strip bonds or deep-discount bonds) –

8. Participating bonds – bonds that participate in excess earnings of

9. Indexed bonds (purchasing power bonds) – bonds that pay interest

10. Inflation-linked bonds (Treasury Inflation Protected Securities ‘

• As to security and risk

15. Debenture bonds – long-term bonds not secured by specific prop

20. Government Bonds – bonds issued by a government and backed

•Bonds are accounted for in much the same way as notes

• Transaction costs on the issuance of bonds (bond issue costs) are i

• Transaction costs are deducted when determining the carrying amo

To record the sale of the bond at face amount

Journal entry approach

To record the sale of the bonds at face amount

An entity issued bonds with a face amount of P5,000,000 at 105.

Premium on bonds payable 25,000

An entity issued bonds with a face amount of P5,000,000 at 95.

Interest expense 25,000

Accounting for interest expense on bonds requires recognition of two

On March 1, 2019, an entity sold bonds with face amount of P5,000,

Sept 1 Interest expense 300,000

Dec 31 Interest expense 200,000

Issuance of bonds on interest date

On June 1, 2019, an entity issued bonds with face amount of P5,000

Dec 1 Interest expense 300,000

Dec 31 Interest expense 17,500

31 Interest expense 50,000

June 1 Interest expense 300,000

Dec 1 Interest expense 300,000

Dec 31 Interest expense 50,000

Dec 31 Interest expense 30,000

If a statement of financial position is prepared on December 31, 2020, th

Bonds payable 5,000,000

• When bonds are issued in between interest dates, any accrued i

On April 1, 2019, an entity issued bonds with face amount of P5,000,000

To record the issue of the bonds on April1, 2019:

Issue price 5,228,000

Jul 1 Interest expense (5M x 12% x ½) 300,000

Dec 31 Interest expense 300,000

Premium on bonds payable 36,000

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

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

Amortization for 9 months from Apr 1 to Dec 31, 2019

Financial statement presentation

Bonds payable, due January 1, 2024 5,000,000

•An entity shall remove a financial liability (or a part of a fin

An entity sold bonds with face amount of P5,000,000 on March 1, 2019

Mar 1, 2024 Bonds payable 5,000,000

Bonds payable 5,000,000

• Retirement of bonds, whether prior to maturity or at maturity and w

• The carrying amount of the bonds is updated for any discount o

The straight-line method of amortization is used for simplicity.

All of the bonds are retired on July 1, 2022 at 97.

1. The amortization of the bond discount is recorded up to July 1, 2022. If the e

Interest expense 27,000

2. Balance of the discount on bonds payable