Learning Objectives:

1. Describe bonds payable.

2. State the initial and subsequent measurement of bonds payable.
3. Apply the present value factors properly.
4. Prepare amortization table.
5. Account for bonds payable.
5. Present the bonds payable in the financial statements.

Time Line of Business Issues Involved with Long-Term Debt

Nature of Bonds

Bond Certificates- commonly referred to as bonds are issued in denominations of P1,000.

Face Value- the amount that will be paid on a bond at maturity date, also known as par value or maturity value.
Bond indenture- a group contract between the corporation and the bondholders.
Types of Bonds

Term bonds- Bonds that mature in one lump sum on a specified future date.
Serial bonds- Bonds that mature in a series of installments at future dates.
Collateral trust bonds- Bonds usually secured by stocks and bonds of other corporations owned by the issuing
company.
Unsecured (debenture) bonds- Bonds for which no specific collateral has been pledged.

Bonds Shares
Issuer’s point of view
a) interests/dividends payments - tax deductible items - not tax deductible items
- constitute a legal & fixed - paid only when sufficient funds
obligation that must be paid and retained earnings are available
b) maturity date - have specific maturity date - do not have maturity date
c) return on investment - lower - higher

What are the primary distinctions between a debt security and an equity security?
Answer: The primary distinctions between debt and equity securities are:
a. Debt security—fixed principal and interest; no voting privileges; fixed maturity date; cash flow dates and
amounts are fixed.
b.Equity security—no fixed principal and interest; voting privileges (common stock); fixed cash flow amounts and
dates.

Explain the difference between the stated rate of interest and the effective rate on a long-term debt security.
Answer: Stated rate of interest—contractual rate specified on the debt instrument; it determines the amount of cash
interest each interest period.
The effective rate of interest is the true interest rate on a debt security. It is determined by the market and it is
based on the resources received currently and the future resource flows. The effective rate is often called
the market rate of interest.

Briefly explain the effects on interest recognized when the stated and effective rates of interest are different.
Answer: An effective interest rate above the stated rate causes a discount and the opposite cause, a premium on the
debt. A discount increases interest reported on the income statement and a premium decreases interest reported
on the income statement (compared with the effects of the stated rate).

Distinguish between the par amount and the price of a bond. When are they the same? When different?.
Answers:
The face (i.e., par) amount of a bond is the maturity amount specified on the bond certificate.
The bond price represents the present value of the future cash flows (principal plus all interest payments) at the
effective rate of interest.
The face amount of bond and its price are the same if the bond has the same stated and effective rates of
interest when issued; otherwise, they will be different.

Bond Issue Costs (or Transaction Costs) – are incremental costs that are directly attributable to the issue of bonds
payable, which include printing and engraving cost, legal and accounting fee, registration fee with regulatory authorities,
commission paid to agents and underwriters and other similar charges.
- PAS 39 (Financial instruments – recognition and measurement) provides that bond issue costs as transaction
costs shall be included in the initial measurement of a financial liability.
- Is not outright expense but amortized over the life of the bonds.
- Lumped with discount on bonds payable or netted against the premium on bonds payable.

Bonds:
 normally are long-term
 bear interest
 issued at a premium or discount
 entail transaction (issue) cost

Initial measurement of bonds payable

a. Not designated at fair value through P/L

- @ fair value less bond issue costs (transaction costs that are directly attributable to the issue of the bonds
payable)

b. Designated @ fair value through P/L

- @ fair value
- bond issue costs are expensed immediately
Subsequent Measurement
a. Amortized cost using effective interest method
b. At fair value thru P/L

a. Amortized cost using effective interest method

Initial cost xx
Less: Principal repayment xx
Add(Less): Cumulative amortization
of discount (cumulative
amortization of premium) xx
Amortized cost xx

b. At fair value thru P/L

- no amortization of bond discount or bond premium.
- any change in fair value is recognized in profit or loss

Bonds may be issued at:

1. interest payment date
2. between interest payment dates

Bonds may be issued at:

1. a discount
2. a premium
3. face value
Yield
10% Premium
Bond
stated
interest 12% Face value
rate
12%
15% Discount

Computation of the market price or issues price of bonds (Bond prices are quoted as a percentage of face value, e.g.
98 or 98%; 105 or 1.05%)

Part 1 Present value of principal (maturity value):

Face amount x present value (PV) of ₱1 factor @ ER for n=number of periods
Part 2: Present value of interest payments:
Periodic payment x PV factor of an ordinary annuity of ₱1 factor@ ER for n.

Example: On January 1, 2020, Barney Company issued a 10-yearbonds with a face amount of ₱5,000,000 and a stated
interest rate of 8% payable annually at every year-end. The bonds were price to yield 10%.
PV of 1 for 10 periods at 10% 0.3855
PV of an ordinary annuity of 1 for 10 periods at 10% 6.145
Required: Compute for the market price of the bonds.

Solution:
PV of principal (₱5,000,000 x .3855) ₱1,927,500
PV of annual interest payments [(₱5,000,000 x 8%) x 6.145] 2,458,000
Total present value or market price ₱4,385,500

Amortization of Discount or Premium on Bonds Payable

a. Straight Line Method
b. Bonds Outstanding Method – applicable to serial bonds
c. Effective Interest Method – distinguishes two kinds of rates: nominal rate and effective rate
Bond issuance at interest date @ a discount
Marbel Co. was authorized to issue ₱5,000,000 of 12% face value bonds on April 1, 2017. Interest on bonds is
payable semiannually on April 1 and October 1. Bonds mature on April 1, 2022. The entire issue was sold on April 1,
2017, at 98. Bond issue cost is ₱50,000.

Required: Prepare all indicated journal entries including any adjustments relating to the issuance of the bonds for 2017
and 2018. Use memorandum approach and the straight line method of amortization.

Solution:
2017
April 1 Cash (₱5M x 98%) - ₱50,000 ₱4,850,000
Discount on bonds payable 100,000
Bond issue cost 50,000
Bonds payable ₱5,000,000
Issuance of the bonds

Oct. 1 Interest expense 300,000

Cash (5,000,000 x 12% x 6/12) 300,000
Periodic interest

Dec. 31 Interest expense 150,000

Accrued interest payable (5,000,000 x 12% x 3/12) 150,000
Accrued interest for 3 mos.

Dec. 31 Interest expense 22,500

Discount on bonds payable (100,000 / 5 x 9/12) 15,000
Bond issue cost (50,000 / 5 x 9/12) 7,500
Amortization of discount and bond issue cost

2018
Jan. 1 Accrued interest payable 150,000
Interest expense 150,000
Reversing entry

April 1 Interest expense 300,000

Cash 300,000
Periodic interest

Oct. 1 Interest Expense 300,000

Cash 300,000
Periodic interest

Dec. 31 Interest Expense 150,000

Accrued Interest Expense 150,000
Accrued interest

Dec. 31 Interest Expense 30,000

Discount on Bonds Payable 20,000
Bond Issue Cost 10,000
Amortization of discount and
bond issue cost
Bond issuance at interest date @ a premium
Marbel Co. was authorized to issue ₱5,000,000 of 12% face value bonds on April 1, 2017. Interest on bonds is
payable semiannually on April 1 and October 1. Bonds mature on April 1, 2022. The entire issue was sold on April 1,
2017, at 103. Bond issue cost is ₱50,000.

Required: Prepare all indicated journal entries including any adjustments relating to the issuance of the bonds for 2017
and 2018. Use memorandum approach and the straight line method of amortization.

Solution:
2017
April 1 Cash (₱5M x 103%) - ₱50,000 ₱5,100,000
Premium on bonds payable ₱ 100,000
Bonds payable 5,000,000
Issuance of the bonds

Oct. 1 Interest expense 300,000

Cash (5,000,000 x 12% x 6/12) 300,000
Periodic interest

Dec. 31 Interest expense 150,000

Accrued interest payable (5,000,000 x 12% x 3/12) 150,000
Accrued interest for 3 mos.

Dec. 31 Premium on bonds payable (100,000 / 5 x 9/12) 15,000

Interest expense 15,000
Amortization of premium on bonds payable

2018
Jan. 1 Accrued interest payable 150,000
Interest expense 150,000
Reversing entry

April 1 Interest expense 300,000

Cash 300,000
Periodic interest

Oct. 1 Interest Expense 300,000

Cash 300,000
Periodic interest

Dec. 31 Interest Expense 150,000

Accrued Interest Expense 150,000
Accrued interest

Dec. 31 Premium on bonds payable(100,000 / 5 ) 20,000

Interest expense 20,000
Amortization of premium on bonds payable

Issuance of bonds between interest dates

- Cash received includes the accrued interest
- The amortization of the discount or premium is over the remaining life of the bonds from the date of issuance
- amortization of discount or premium is taken every interest payment date.
- take up adjusting entry for the accrued interest and amortization at the reporting period if the interest
payment date does not coincide with December 31

Issued at a discount Issued at a premium

Entry: Cash xx Cash xx
Discount on Bonds Payable xx Bonds Payable xx
Bonds Payable xx Premium on Bonds Payable xx
Interest Expense xx Interest Expense xx
Problems:
1. Bonds at a Premium, Accrued Interest: Straight Line On September 1, 2019, Alpha Company issued to Stay@Home
Company ₱30,000, five-year, 9% (payable semiannually) bonds for ₱32,320 plus accrued interest. The bonds were dated
July 1, 2019, and interest is payable each June 30 and December 31. The accounting period for each company ends on
December 31.

Required: Give entries for the issuer and the investor for the following dates: September 1, 2019; December 31, 2019;
and June 30, 2020. Assume that the difference between the interest method and straight-line method amortization
amounts is not material; therefore, use straight-line amortization. Youngblood intends to hold the bonds to maturity.

Answer:
Issuer-Alpha Company Investor-Stay@Home Company
September 1, 2019:
Cash ₱32,770 Investment in bonds ₱32,320
Bonds payable ₱30,000 Interest receivable 450
Interest payable 450* Cash ₱32,770
Premium on bonds payable 2,320
*Accrued interest
/(₱30,000 x 4½ x 2/6) ₱ 450
Price of bonds 32,320
Total cash ₱32,770

December 31, 2019:

Interest payable 450 Cash 1,350
Interest expense 740 Investment in bonds 160
Premium on bonds payable 160 Interest revenue 750
Cash 1,350 Interest receivable 450

₱2,320 x 4/58 = ₱160 (Amortization period: 5 years minus 2 months = 58 months).

4 months (Sept. – Dec.)

₱30,000 x 4½% = ₱1,350.

June 30, 2020:

Interest expense 1,110 Cash 1,350
Premium on bonds payable 240 Investment in bonds 240
Cash 1,350 Interest revenue 1,110

2. Problem:
Ryan Corporation sold and issued ₱75,000 of three-year, 8% (payable semi-annually) bonds payable for ₱78,200 plus
accrued interest. Interest is payable each February 28 and August 31. The bonds were dated March 1, 2019, and were
sold on July 1, 2019. The accounting period ends on December 31.
Required:
1. How much accrued interest should be recognized at date of sale?
2. How long is the amortization period?
3. Give entries for Ryan Corporation through February 2019. Use straight-line amortization.
4. Would the above amounts also be recorded by the investor if the intent was to hold the bonds to maturity?
Explain.

Answers:
Requirement 1
Accrued interest for March-June: ₱75,000 x 4% x 4/6 = P2,000.

Requirement 2
Amortization period: 3 years - 4 months = 32 months.
Requirement 3
Gross method and straight-line amortization:

July 1, 2019:

Cash ₱80,200*
Bonds payable. ₱75,000
Premium on bonds payable 3,200
Interest payable (per Requirement 1) 2,000

*Price of bond ₱78,200

Accrued interest per (Req. 1) 2,000
Cash ₱80,200

August 31, 2019:

Interest payable 2,000

Interest expense 800 (₱75,000 x 4% x 2/12) - ₱200
Premium on bonds payable 200
Cash 3,000

P75,000 x 4% = ₱3,000.
P3,200 x 2/32 = ₱ 200 (amortization for July and August).

December 31, 2012 (adjusting entry):

Interest expense 1,600

Premium on bonds payable 400
Interest payable 2,000
P75,000 x 4% x 4/6 = ₱2,000.
P3,200 x 4/32 = P400 (amortization for September through December).

February 28, 2020:

Interest expense 800

Premium on bonds payable (P3,200 x 2/32) 200
Interest payable 2,000
Cash 3,000

Requirement 4
Yes, the above amounts would be recorded by the investor in the accounts that parallel those for the issuer, Ryan
Corporation. Asset and revenue accounts would be used instead of liability and expense accounts.

Effective Interest Method of Amortization

On March 1, 2019, Pyne Furniture Co. issued ₱700,000 of 10% bonds to yield 8%. Interest is payable semi-
annually on February 28 and August 31. The bonds mature in ten years. Pyne Furniture Co. is a calendar-year
corporation.
Required:
(1) Determine the issue price of the bonds. Show your computations.
(2) Prepare an amortization table through the first two interest periods using the effective-interest method.
(3) Prepare the journal entries to record bond-related transactions as of the following dates:
(a) March 1, 2019
(b) August 31, 2019
(c) December 31, 2019
(d) February 28, 2020
ANS:
1. Calculation of bond sales price: i = 4% n = 20
Present value of the face amount (₽700,000 x .4564) ₽319,480
Present value of the interest (P35,000 x 13.5903) 475,661
₽795,141

2. Amortization table:
Interest Interest Interest Amortization Carrying
Date Payment Expense of Premium Value
3/01/2019 ₱795,141
8/31/2019 ₱35,000 ₱31,806* ₱3,194 791,947
2/28/2020 35,000 31,678** 3,322 788,625

Computations:
* ₱795,141 x 4% = ₱31,806
** ₱791,947 x 4% = ₱31,678

3. Journal entries:

(a) 3/1/2019 Cash ₱795,141

Premium on Bonds Payable ₱ 95,741
Bonds Payable 700,000

(b) 8/31/2019 Interest Expense (₱35,000-₱3,194) 31,806

Premium on Bonds Payable 3,194
Cash 35,000

(c) 12/31/2019 Interest Expense (P31,678 x 4/6) 21,119

Premium on Bonds Payable(P3,322 x 4/6) 2,215
Interest Payable (P35,000 x 4/6) 23,334

(d) Assuming no reversing entries:

2/28/2020 Interest Payable 23,334
Premium on Bonds Payable 1,107
Interest Expense 10,559
Cash 35,000

Bond Retirement Prior to Maturity Date

- When bonds are retired prior to maturity date, any difference between the retirement price and the
carrying amount (updated for any discount or premium amortization up to the date of retirement) is
recognized as gain or loss in P/L.

Problem:
The December 31, 2019, statement of financial position of Far Imports includes the following items:
9% bonds payable due 12/31/2029 ₱800,000
Discount on bonds payable 21,600
The bonds were issued on December 31, 2019, at 97, with interest payable on June 30 and December 31 of each year.
The straight-line method is used for discount amortization. On March 1, 2020, Far Imports retired ₱400,000 of these
bonds at 98 plus accrued interest. Prepare the journal entries to record retirement of the bonds, including accrual of
interest since the last payment and amortization of the discount.

ANS:
3/1/2020 Interest Expense ₱6,000
Interest Payable ₱6,000
(₱400,000 x 9% x 2/12)

Interest Expense ................ 200

Discount on Bonds Payable ..... 200
(₱24,000/10 years = ₱2,400 per year)
(₱2,400 x 1/2 x 2/12 = ₱200)
 Interest Payable 6,000
Bonds Payable 400,000
Loss on Early Retirement of Bonds** 2,600
Discount on Bond Payable* 10,600
Cash (₱392,000 + ₱6,000) 398,000

*₱10,800 - ₱200 = ₱10,600

** Reacquisition Price (₱400,000 x 98%) ₱392,000
Carrying Value (₱400,000 - ₱10,600)... 389,400
Loss on Early Retirement of Bonds..... ₱ 2,600

Serial Bonds – are bonds in which the principal matures in installments. The periodic payments on serial
bonds consist of payments for both interest and principal.

Problem:
On January 1, 2020, ABC Co. issued 10%, ₽3,000,000 bonds for ₽2,900,305. The principal matures in three
equal annual installments, payable at each year-end, plus interest on the outstanding principal balance. The
effective interest rate is 12%.
Required: Prepare pertinent journal entries and amortization table.

Answer:

Amortization table
Amount
Int. on Total Interest Discount applied to Present
Principal outstanding Interest payments expense Amortization principal Value
(f-d)
Date Payments balance payments (b+d) (I x .12) (b-g) (i-h)
(g)
(a) (b) (c ) (d) (e) (f) (h) (i)
Jan. 1, 2020 2,900,305
Dec. 31, 2020 1,000,000 3,000,000 x 10% 300,000 1,300,000 348,037 48,037 951,963 1,948,342
Dec. 31, 2021 1,000,000 2,000,000 x 10% 200,000 1,200,000 233,801 33,801 966,199 982,143
Dec. 31, 2022 1,000,000 1,000,000 x 0% 100,000 1,100,000 117,857 17,857 982,143 -
3,000,000 99,695
======== ======

2020
Jan. 1 Cash 2,900,305
Discount on bonds payable 99,695
Bonds payable 3,000,000

Dec. 31 Interest expense 348,037

Bonds payable 1,000,000
Cash 1,300,000
48,037
2021
Dec. 31 Interest expense 233,801
Bonds payable 1,000,000
Cash 1,200,000
33,801
2022
Dec. 31 Interest expense 117,857
Bonds payable 1,000,000
Cash 1,300,000
17,857
Zero-coupon bonds – are bonds that do not pay periodic interests. Both principal and compounded interests
are due only at maturity date.

Problem: On January 1, 2020, ABC Co. issued 10% ₽3,000,000 bonds at a yield to maturity interest of 18%.
Principal and interest are due on December 31, 2022.

Solution:

Amortization Table
Interest Discount on Present
Date Interest payments Expense bonds payable Value of cash flow
(e x 18%) (c-b) (e)
(a) (b) (c) (d)
Jan. 1, 2020 2,430,263
Dec. 31, 2020 (3M x 10%) = 300,000 437,447 137,447 2,867,710
Dec. 31, 2021 (3M + 300,000) x 10% = 330,000 516,188 186,188 3,383,898
Dec. 31, 2022 (3M + 300,000+330,000) x 10% = 363,000 609,102 246,102 3,993,000

Entries:
2020
Jan. 1 Cash 2,430,263
Discount on bonds payable 569,737
Bonds payable 3,000,000

Dec. 31 Interest expense 437,447

Discounts on bonds payable 137,447
Interest payable 300,000

2021
Dec. 31 Interest expense 516,188
Discounts on bonds payable 186,188
Interest payable 330,000

2022
Dec. 31 Interest expense 609,102
Discounts on bonds payable 246,102
Interest payable 363,000