INTERMEDIATE ACCOUNTING 2 1st Semester, SY 2022-2023

Learning Material 5
BONDS PAYABLE: Fair Value Option

A. Discussion of Accounting Principles

1. Definition of Bond
 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
principal sum is paid.

 A bond is a contract of debt whereby one party called the issuer borrows funds from another
party called the investor.

 A bond is evidenced by a certificate and the contractual agreement between the issuer and
investor is contained in a document known as “bond indenture”.

2. Term and Serial Bonds

 Term bonds are bonds with a single date of maturity. May require the issuing entity to establish
a sinking fund to provide adequate money to retire the bond issue at one time.

 Serial bonds are bonds with a series of maturity dates instead of a single one. These bonds allow
the issuing entity to retire the bonds by installments.

3. Secured and unsecured bonds

 Mortgage bonds are bonds secured by a mortgage on real properties.

 Collateral trust bonds are bonds secured by shares and bonds of other corporations.

 Debenture bonds are unsecured or bonds without collateral security.

4. Registered and bearer bonds

 Registered bonds require the registration of the name of the bondholders on the books of the
corporation.

 If the bondholder sells a bond, the old bond certificate is surrendered to the entity and a new bond
certificate is issued to the buyer. Interest is periodically paid by the issuing entity to bondholders
of record.

 Coupon or bearer bonds are unregistered bonds in the sense that the name of the bondholder is
not recorded on the entity books.

 The issuing entity does not maintain a record of two owns the bonds at any point in time.

 Thus, interest on coupon bonds is paid to the person submitting a detachable interest coupon.

5. Other types of bonds

 Convertible bonds are bonds that can be exchanged for shares of the issuing entity.

 Callable bonds are bonds which may be called in for redemption prior to the maturity date.

 Guaranteed bonds are bonds issued whereby another party promises to make payment if the
borrower fails to do so.

 Junks bonds are hig-risk, high-yield bond issued by entities that are heavily indebted or
otherwise in weak financial condition.
  Zero-coupon bonds are bonds that pay no interest but the bonds offer a return in the form of a
“deep discount” or huge discount from the face amount.

6. Features of bond issue

a. A bond identure or deed of trust of the document which shows in detail the terms of the loan and
the rights and duties of the borrower and other parties to the contract.

b. Bond certificates are used. Each bond certificate represents a portion of the total loan. The usual
minimum denomination in business practice is P1,000, although smaller denominations may be
issued occasionally.

c. If property is pledged as security for the loan, a trustee is named to hold title to the property
serving as security. The trustee acts as the representative of the bondholders and is usually a bank
ir trust entity.

d. A bank or trust entity is usually appointed as registrar or disbursing agent. The borrower deposits
interest and principal payments with the disbursing agent, who then distributes the funds to the
bondholders.

7. Content of bonds indenture

The bond indenture is the contract between the bondholders and the borrower or issuing entity.
Normally, the bond indenture contains the following items:

a. Characteristics of the bonds

b. Maturity date and provision for repayment
c. Period of grace allowed to issuing entity
d. Establishment of a sinking fund and the periodic deposit therein.
e. Deposit to cover interest payments
f. Provisions affecting mortgaged property, such as taxes, insurance coverage, collection of
interest or dividends on collaterals
g. Access to corporate books and records of trustee
h. Certificate of bonds by trustee
i. Required debt to equity ratio
j. Minimum working capital to be maintained, if any.

8. Sale of bonds
 The bonds needed for the issuance of bonds are usually too large for one buyer to pay. Very
often, the bonds are divided into various denominations of say P100, P1,000, P10,000, thus
enabling more than one buyer or investor to purchase the bonds.

 Instead of selling bonds of various denominations, the bonds are sold in equal denominations of
say P1,000 only. The P1,000 denomination is called the face amount of the bonds. Each bond is
evidenced by a certificate called a bond certificate.

 For example, if the bonds with face amount of 50,000,000 are sold, dividend into p1,000
denomination, there shall be 50,000 bond certificates containing a face amount of P1,000.

 The sale of the bonds may be undertaken by the entity itself. Normally however, the issuing entity
does not attempt to sell the bonds directly to the public.

 Instead, the entire bond issue is sold to an underwritter or investment bank that assumes
responsibility for reselling the bonds to investors.

 Sometimes, the underwriter merely undertakes to sell the bonds on the basis of a commission to
be deducted from the proceeds of sale.

 When an entity sells a bond issue, it undertakes to pay the face amount of the bond issue on
maturity date and the periodic interest.
  Interest is usually payable semiannually or every six months as follows:
a. January 1 and July 1
b. February 1 and August 1
c. March 1 and September 1
d. April 1 and October 1
e. May 1 and November 1
f. June 1 and December 1

 There are certain bonds that pay interest annually or at the end of every bond year.

9. Initial measurement of bonds payable

 PFRS 9, paragraph 5.1.1, provides that the bonds payable not designated at fair value through
profit or loss shall be measured initially at fair value minus transaction costs that are directly
attributable to the issue of the bonds payable.

 The fair value of the bonds payable is equal to the present value of the future cash payments to
settle the bond liability.

 Bond issue costs shall be deducted from the fair value or issue price of the bonds payable in
measuring initially the bonds payable.

 If the bonds are designated and accounted for “at fair value through profit or loss”, the bond issue
costs are treated as expense immediately.

 The fair value of the bonds payable is the same as the issue price or net proceeds from the issue
of the bonds, excluding accrued interest.

10. Subsequent measurement of bonds payable

 PFRS 9, paragraph 5.3.1, provides that after iitial recognition, bonds payable shall be measured
either:
a. At amortized cost, using the effective interest method
b. At fair value through profit or loss

11. Amortized cost of bonds payable

 The amortized cost of bonds payable is the amount at which the bond liability is measured
initially minus principal repayment, plus or minus the cumulative amortization using the effective
interest method of any difference between the face amount and present value of the bonds
payable.

 The difference between the face amount ad present value is either discount or premium on the
issue of the bonds payable.

12. Accounting for issuance of bonds

 Two approaches in accounting for the authorization and issuance of bonds:
a. Memorandum approach
b. Journal entry approach

 Illustrative problems are provided in Activity 2.

13. Bond issue costs

 Bond issue costs directly attributable to the issue of bonds payable.

 Such costs include printing and engraving cost, legal and accounting fee, registration fee with
regulatory authorities, commission paid to agents and underwriters and other similar charges.
 Under PFRS 9, bond issue costs shall be deducted from the fair value of issue price of bonds
payable in measuring initially the bonds payable.

 Under the effective interest method of amortization, the bond issue cost must be “lumped” with
the discount on bonds payable and “netted” against the premium on bonds payable.
  If the bonds are measured at fair value through profit or loss, the bond issue cost are expensed
immediately.

14. 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

15. Bond retirement on maturity date

 To make a bond issue more attractive, an entity may agree, in the bond indenture to establish a
sinking fund exclusively for us in retiring the bonds at maturity.

 The periodic cash deposits plus the interest earned on sinking fund securities should cause the
fund to approximately equal the amount of the bond issue on maturity date.

 When the bonds approach maturity date, the trustee sells the securities and uses the sinking fund
cash to pay the bondholders. Any excess cash is returned to the issuing entity.

16. Bond retirement prior to maturity date

 When bonds are reacquired prior to maturitydate, they may be canceled and permanently retired,
or held in the treasury for future reissue when the need for fund arises.

 The retirement of bonds prior to maturity date may present some complex accounting problems.
1. The bond premium or bond discount should be amortized up to the date of retirement.
2. The balance of the bonds premium or bond discount should be determined. This balance is
important because the amount related to the bonds retired is canceled.
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 face 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 bonds is computed.

This is the difference between the retirement price and the carrying amount of the bonds.
If the retirement price is more than the carrying amount of the bonds, there is loss.

If the retirement price is less than the carryig amount of the bonds, there is gain.

7. The retirement of the bonds is then recorded by canceling the bond liability together with the
unamortized premium or discount. Any accrued interest is debited to interest expense.

17. Treasury bonds

 Treasury bonds are an entity’s own bonds originally issued and reacquired but not canceled. The
acquisition of treasury bonds calls for the same accounting procedures accorded to a formal
retirement of bonds prior to the maturity date.

 Treasury bonds should be debited at face amount and any related unamortized premium or
discount should be canceled. Any accrued interest paid is charged to interest expense.

 The difference between the acquisition cost and the carrying amount of the treasury bonds is
treated a gain or loss on the acquisition of treasury bonds.

18. Bond refunding

 Bond refunding is the floating of new bonds the proceeds from which are used is paying the
original bonds.

 Bond refunding is a premature retirement of the old bonds by means of issuing new bonds. Bond
refunding is also known as bond refinancing.
  Refunding may be made on or before the date of maturity of the old bonds.

 Where refunding is made on the date of maturity of the old bonds, no accounting problem arises
as this would simply call for the cancelation of the bond liability. There is no unamortized
premium or discount involved.

 The retirement is handled in the usual manner and the new bond issue is recorded in the normal
way.

 Where refunding is made prior to the maturity date of the old bonds, consideration must be given
to the refunding charges pertaining to the old bonds.

 The refunding charges include the unamortized bond discount or premium and redemption
premium on the old bonds being refunded.

 The accounting problem is the treatment of these refunding charges.

 Bond refunding shall be accounted for as an extinguishment of a financial liability.

 The difference between the carrying amount of the financial liability extinguished and the
consideration paid shall be included in profit or loss.

 Accordingly, the refunding charges are charged to loss on extinguishment.

19. Amortization of bond discount or premium

 Three approaches in amortizing bond premium or bond discount:
a. Straight line
b. Bond outstanding method
c. Effective interest method or simply “interest method” or scientific method

 PFRS 9 requires the use of the effective interest method in amortizing discounts, premiums and
bond issue cost.

20. Straight line method

 The straight line method provides for an equal amortization of bond premium or bond discount.

 The procedures is simply to divide the amount of bond premium or bond discount by the life of
the bonds to arrive at the periodic amortization.

 The life of the bonds is that period commencing on the date of sale of the bonds up to the maturity
date.

21. Bond outstanding method

 The bond outstanding method is applicable to serial bonds whether issued at discount or
premium.

 Serial bonds are those with a series of maturity dates.

 For example, bonds with face amount of P5,000,000 are issued and mature at the rate of
P1,000,000 every year for 5 years.

 As the name implies, the bond outstanding amortization approach gives recognition to the
deminishing balance of the bonds.

 It is based on the theory that interest expense shall decrease every year by reason of the decreasing
principal bond liability.
22. Premature retirement of serial bonds
 When serial bonds are paid on the regular maturity dates, no accounting problem arises because
no unamortized discount or premium is related to such serial bonds retired.

 The problem occurs when the serial bonds are retired prior to their scheduled maturity dates.

 In this case, the retirement calls for the cancelation of any unamortized discount or premium
related to the serial bonds retired.

 The question is how much unamortized premium or discount is applicable to the serial bonds
retired prior to their maturity date?

23. Accounting procedures

1. Get the ratio of the total premium or discount to the common denominator of the 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 the bonds retired. The answer gives the
unamortized premium or discount per year related to the bonds retired.

P1,000,000 x .02 = P20,000 unamortized primium per year

3. Multiply the unamortized premium or discount per year computed in (2) by the period from the
date or retirement to the scheduled maturity date of the retired bonds.

P20,000 x 2 years = P40,000 unamortized premium related to the

P1,000,000 face value bond retired

24. Fair value option of measuring bonds payable

 PFRS 9, paragraph 4.2.2, provides that at initial recognition, bonds payable may be irrevocably
designated as at fair value through profit or loss.

 Under the fair value option, the bonds payable shall be measured initially at fair value and
remeasured at every year-end with any changes in fair value generally recognized in profit or
loss.

 There is no more amortization of bond discount and bond discount and bond premium. Any
transaction cost or bond issue cost should be expensed immediately.

 As a matter of fact, interest expense is recognized using the nominal or stated rate.

25. Changes in fair value recognized in OCI

 PFRS, paragraph 5.7.7, provides that the gain or loss on financial liability designated at fair value
through profit or loss shall be accounted for as follows:

a. The change in fair value attributable to the credit risk of the liability is recognized in other
comprehensive income.

Credit risk is the risk that the issuer of the liability would cause a financial loss to the other
party by failing to discharge the obligation.

Credit risk does not include market risk such as interest risk, currency risk and price risk.

b. The remaining amout if the change in fair value is recognized in profit or loss.
  Paragraph 5.7.8 provides, however, that if presenting the change in fair value attributable to credit
risk would create or enlarge an accounting mismatch, all gains and losses including the effects
to changes in credit risk are recognized in profit or loss.

 An accounting mismatch would be created or enlarged if presenting the efffects of changes in the
credit risk in other comprehensive income would result in a material or greater differences in
profit or loss than if those amounts were presented in profit or loss.

 Application Guidance B5.7.9 provides that amounts recognized in other comprehensive income
resulting from changes in fair value of credit risk of a financial liability designated at fair value
through profit or loss shall not be subsequently transferred to profit or loss.

 The cumulative gain or loss recognized may be transferred withing equity or retained earnings.

B. Application Exercises

You are provided with exercises and the corresponding solution. The objective is to demonstrate the
application of the accounting principles discussed for bonds payable: fair value option.

Exercise 1

Mercury Company was authorized to issue 12%, 10-year bonds with face amount of P7,000,000 on April
1, 2020. Interest on the bonds is payable semi-annually on April 1 and October 1 of each year.

The bonds were sold to underwriters on April 1, 2021 at 106. The entity amortizes discount or premium
only at the end of the fiscal year using the straight line method.

Required:
1. Prepare journal entries for 2021 and 2022 including adjustments at the end of each year. Use
memorandum approach.
2. Present the bonds payable in the statement of financial position on December 31, 2022.

Solution to Exercise 1

Requirement 1

2021
April 1 Cash (7,000,000 x 106%) 7,420,000
Bonds payable 7,000,000
Premium on bonds payable 420,000

Oct. 1 Interest expense (7,000,000 x 12% x 6/12) 420,000

Cash 420,000

Dec. 31 Interest expense (7,000,000 x 12% x 3/12) 210,000

Accrued interest payable 210,000

Dec. 31 Premium on bonds payable 31,500

Interest expense 31,500
(420,000/10 years x 9/12)

2022
Jan. 1 Accrued interest payable 210,000
Interest expense 210,000

April 1 Interest expense 420,000

Cash 420,000

Oct. 1 Interest expense 420,000

Cash 420,000
 Dec. 31 Interest expense 210,000
Accrued interest payable 210,000

31 Premium on bonds payable 42,000

Interest expense 42,000
(420,000/10 yrs)

Requirement 2
Bonds payable 7,000,000
Premium on bonds payable (420,000 – 73,500) 346,500
Carrying Amount (Book value) 7,346,500

Exercise 2

Mars Company was authorized to issue 10-year, 12% bonds with face amount of P8,000,000. The bonds
are dated January 1, 2021, and interest is payable semiannually on June 30 and December 31. The bods
were sold as follows:
January 1, 2021 5,000,000 at 95
September 1, 2022 2,000,000 at 103 plus accrued interest

Required:
1. Prepare journal entries relating to the bonds payable in 2021 and 2022. Straight line amortization is
used, and unissued bonds payable account is set up.
2. Show how information relative to the bond issue will be reported in the statement of financial position
prepared on December 31, 2022.

Solution to Exercise 2

Requirement 1

2021
Jan. 1 Unissued bonds payable 8,000,000
Authorized bonds payable 8,000,000

1 Cash (5,000,000 x 95%) 4,750,000

Discount on bonds payable 250,000
Unissued bonds payable 5,000,000

June 30 Interest expense (5,000,000 x 12% x 6/12) 300,000

Cash 300,000

Dec. 31 Interest expense 300,000

Cash 300,000

31 Interest expense (250,000/10 yrs) 25,000

Discount on bonds payable 25,000

2022
June 30 Interest expense 300,000
Cash 300,000

Sept. 1 Cash 2,100,000

Unissued bonds payable 2,000,000
Premium on bonds payable 60,000
Interest expense (2,000,000 x 12% x 2/12) 40,000

Dec. 31 Interest expense 420,000

Cash (7,000,000 x 12% x 6/12) 420,000

31 Interest expense 25,000

Discount on bonds payable 25,000
 31 Premium on bonds payable 2,400
Interest expense 2,400

120 months – 20 = 100 months remaining

60,000/ 100 = 600 monthly
600 x 4 = 2,400
Requirement 2
Noncurrent Liabilities:
Authorized bonds payable 8,000,000
Less: Unissued bonds payable 1,000,000
Issued bonds payable 7,000,000
Premium on bonds payable (60,000 – 2,400) 57,600
Total 7,057,600
Discount on bonds payable (200,000)
Book Value/ Carrying Amount 6,857,600

Exercise 3
Saturn Company was authorized to issue 12% bonds with face amount of P5,000,000 on April 1, 2021.
Interest on the bonds is payable semiannually on April 1 and October 1. Bonds mature on April 1, 2026.

The entire issue was sold on April 1, 2021, at 98 less bond issue cost of P50,000.

On July 1, 2022, bonds of P2,000,000 face amount 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 2021 and
2022. Use memorandum approach and the straight line method of amortization.
2. Present the bonds payable in the statement of financial position on December 31, 2022.

Solution to Exercise 3
Requirement 1
2021
April 1 Cash 4,850,000
Discount on bonds payable 100,000
Bond issue cost 50,000
Bonds payable 5,000,000
Oct. 1 Interest expense 300,000
Cash (5,000,000 x 12% x 6/12) 300,000

31 Interest expense 150,000

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

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

2022
Jan. 1 Accrued interest payable 150,000
Interest expense 150,000

April 1 Interest expense 300,000

Cash 300,000

July 1 Interest expense 15,000

Discount on bonds payable (20,000 x 6/12) 10,000
Bond issue cost (10,000 x 6/12) 5,000

Retirement price (2,000,000 x 99%) 1,980,000

Add: Accrued interest from April 1 to July 1, 2021
(2,000,000 x 12% x 3/12) 60,000
Total payment 2,040,000
 Bonds payable retired 2,000,000
Less: Applicable discount (2/5 x 75,000) 30,000
Applicable issue cost (2/5 x 37,500) 15,000 45,000
Book value of bonds retired 1,955,000
Less: Retirement price 1,980,000
Loss on early retirement ( 25,000)

1 Bonds payable 2,000,000

Interest expense 60,000
Loss on early retirement 25,000
Cash 2,040,000
Discount on bonds payable 30,000
Bond issue cost 15,000

Oct. 1 Interest expense 180,000

Cash (3,000,000 x 12% x 6/12) 180,000

Dec. 31 Interest expense 90,000

Accrued interest payable 90,000
(3,000,000 x 12% x 3/12)

31 Interest expense 9,000

Discount on bonds payable (12,000 x 6/12) 6,000
Bond issue cost (6,000 x 6/12) 3,000

Revised annual amortization:

Discount (3/5 x 20,000) 12,000
Issue cost (3/5 x 10,000) 6,000

Requirement 2
Noncurrent liabilities:
Bonds payable 3,000,000
Discount on bonds payable ( 39,000)
Book value/Carrying amount 2,961,000

Other noncurrent asset:

Bond issue cost 19,500

Exercise 4

Neptune Company disclosed the following accounts on December 31, 2021:

12% Bonds Payable – Due January 1, 2024

Jan. 1, 2021 Jan. 1, 2014 6,000,000
P3,000,000 face amount
purchased at 90 and
retired 2,700,000

Discount on Bonds Payable

Jan. 1, 2014 300,000

Required:
1. Compute the balance of bonds payable and discount on bonds payable on December 31, 2021. The
straight line method of amortizxation is used.
2. Compute bond interest expense for the year ended December 31, 2021. Interest is payable
semiannually on January 1 and July 1.
3. Prepare adjusting entries on December 31, 2021.
 Solution to Exercise 4

1. Total bonds payable issued 6,000,000

Less: Face value of bonds payable retired 3,000,000
Bonds payable – December 31, 2021 3,000,000

Discount on bonds payable 300,000

Less: Amortization from 2013 to 2019 (300,000/10 x 7) 210,000
Balance – January 1, 2021 90,000
Less: Discount applicable to bonds retired (3/6 x 90,000) 45,000
Adjusted balance 45,000
Less: Amortization for 2021 (3/6 x 30,000) 15,000
Discount on bonds payable – December 31, 2021 30,000

2. Interest (3,000,000 x 12%) 360,000

Amortization of discount for 2021 15,000
Interest expense for 2021 375,000

3. Adjusting entries on December 31, 2021:

a. Retained earnings 210,000

Discount on bonds payable 210,000

b. Bonds payable 300,000

Discount on bonds payable 45,000
Gain on early retirement of bonds 255,000

Bonds payable retired 3,000,000

Less: Applicable discount 45,000
Book value 2,955,000
Less: Retirement price 2,700,000
Gain on early retirement 255,000

c. Interest expense 15,000

Discount on bonds payable 15,000
Amortization for 2020.

d. Interest expense 180,000

Accrued interest payable 180,000
(3,000,000 x 12% x ½)

Exercise 5

Jupiter Company issued P8,000,000 12% bonds on December 31, 2021 at 96. Interest is payable annually
on December 31.

Bond maturity
December 31
2023 1,000,000
2024 1,000,000
2025 1,000,000
2026 1,000,000
2027 2,000,000
2028 2,000,000
8,000,000
Required:
a. Prepare a schedule showing the annual amortization of the bond discount using the bond outstanding
method.
b. Prepare journal entries from 2021 to 2024.
 Solution to Exercise 5

a. Amortization table

Bond Discount Interest Interest

Year outstanding Fraction amortization paid expense

2022 8,000,000 8/40 64,000 960,000 1,024,000

2023 8,000,000 8/40 64,000 960,000 1,024,000
2024 7,000,000 7/40 56,000 840,000 896,000
2025 6,000,000 6/40 48,000 720,000 768,000
2026 5,000,000 5/40 40,000 600,000 640,000
2027 4,000,000 4/40 32,000 480,000 512,000
2028 2,000,000 2/40 16,000 240,000 256,000
40,000,000 320,000 4,800,000 5,120,000

b. Journal Entries

2021
Dec. 31 Cash 7,680,000
Discount on bonds payable 320,000
Bonds payable 8,000,000

2022
Dec. 31 Interest expense 960,000
Cash 960,000

31 Interest expense 64,000

Discount on bonds payable 64,000

2023
Dec. 31 Interest expense 960,000
Cash 960,000

Dec. 31 Interest expense 64,000

Discount on bonds payable 64,000

31 Bonds payable 1,000,000

Cash 1,000,000

2024
Dec. 31 Interest expense 840,000
Cash 840,000

31 Interest expense 56,000

Discount on bonds payable 56,000

31 Bonds payable 1,000,000

Cash 1,000,000

C. Evaluation Exercises
Provide answers to the following exercises:

A. Theoretical Exercises – Group Task

Choose the correct answer by writing the corresponding letter-answer and a convincing justification that
it is indeed the correct answer. Briefly explain or provide justifiable reason/s via applicable appropriate
accounting principles discussed in A.

1. Most corporate bonds are

a. Mortgage bonds c. Secured bonds
b. Debenture bonds d. Collateral bonds
2. The method used to pay interest depends on whether the bonds are
a. Registered or coupon c. Indebentured or debentured
b. Mortgaged or unmortgaged d. Callable or redeemed

3. Zero-coupon bonds
a. Offer a return in the form of a deep discount off the face amount
b. Result in zero interest expense for the issuer
c. Result in zero interest revenue for the investor
d. Are reported as shareholders’ equity by the issuer

4. To evaluate the risk and quality of an individual bond issue, investors rely heavily on
a. Bond ratings provided by investment houses c. Bond interest payments
b. Newspaper articles d. The audit report

5. Bonds payable should be reported as noncurrent at

a. Face amount less any unamortized discount or plus any unamortized premium
b. Current market price
c. Face amount less any unamortized premium or plus any unamortized discount
d. Face amount less accrued interest since the last interest payment date

7. In the amortization schedule for discount on bonds payable

a. The interest expense is less with each successive interest payment
b. The total effective interest over the term to maturity is equal to the amount of the discount plus
the total cash interest paid
c. The carrying amount of the bonds payable declines eventually to face amount
d. The reduction in the discount is less with each successive interest payment

8. An amortization schedule for bonds issued at a premium

a. Summarizes the amortization of the premium on bonds payable, a contra-asset account
b. Is reported in the statement of financial position
c. Is a schedule that reflects the changes is the bonds payable over the term to maturity
d. All of these are correct

9. An entity has bonds outstanding during a year in which the market rate of interest has risen. The
entity elected the fair value option. What will the entity report for the year?
a. Interest expense and a gain c. A gain and no interest expense
b. Interest expense and a loss d. A loss and no interest expense

10. How would the amortization of premium on bonds payable affect the carrying amount of bond and
net income, respectively?
a. Increase and Decrease c. Decrease and Decrease
b. Increase and Increase d. Decrase and Increase

11. How would the amortization of discount on bonds payable affect the carrying amount of bond and
net income, respectively?
a. Increase and Decrease c. Decrease and Decrease
b. Increase and Increase d. Decrease and Increase

12. Unamortized bond discount should be reported as

a. Direct deduction from the face amount of the bond c. Deferred charge
b. Direct deduction from the present value of the bond d. Part of the bond issue cost

13. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on
June 1, the amount of cash received by the issuer will be
a. Decreased by accrued interest from June 1 to November 1
b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from June 1 to November 1
d. Increased by accrued interest from May 1 to June 1
14. The issuer of a bond sold at face amount with interest payable February 1 and August 1 should report
a. Liability for accrued interest c. Increase in deferred charge
b. An addition to bonds payable d. Contingent liability

15. A bond issued on June 1 has interest payment dates of April 1 and October 1. Bond interest expense
for the current year ended December 31 is for a period of
a. Three months c. Six months
b. Four months d. Seven months

16. A bond was issued at a discount with a call provision. When the bond issuer exercised the call
provision on an interest date, the amount of bond liability derecognized should have equaled the
a. Call price c. Face amount less unamortized discount
b. Call price less unamortized discount d. Face amount plus unamortized discount

17. When bonds are sold between interest dates, any accrued interest is credited to
a. Interest payable c. Intrerest receivable
b. Interest revenue d. Bonds payable

18. Which statement is true about accrued interest on bonds sold between interest dates?
a. The accrued interest is computed at the effective rate.
b. The accrued interest will be paid to the seller when the bonds mature.
c. The accrued interest is extra income to the buyer.
d. all of the statements are not true.

19. An entity neglected to amortize the discount on outstanding bonds payable. What is the effect of the
failure to record discount amortization on interest expense and bond carrying amount, respectively?
a. Understated and understated c. Overstated and overstated
b. Understaed and overstated d. Overstated and understated

20. An entity neglected to amortize the premium on oustanding bonds payable. What is the effect of the
failure to record premium amortization on interest expense and bond carrying amount, respectively?
a. Understated and understated c. Overstated and overstated
b. Understaed and overstated d. Overstated and understated

B. Practical Exercises – Group Task

Solve the following problems with supporting computations presented in good form:

1. Venus Company reported the following accounts on December 31, 2021:

Premium on bonds payable 50,000

Accrued interest on bonds payable 180,000
Bonds payable, due January 1, 2025, interest at 12% payable semiannually
on January 1 and July 1 3,000,000

On December 31, 2021, cash of P3,900,000 was made available from the sale of 10-year 10% bonds
with face amount of P4,000,000.

The cash received from the new issue was used for retirement of the 12% bonds at a call price of 102
plus accrued interest.

Required: Prepare journal entries to record the bond refunding.

2. Galaxy Company issued P8,000,000 12% bonds on December 31, 2021 at 96. Interest is payable
annually on December 31.

Bond maturity
December 31
2023 1,000,000
2024 1,000,000
2025 1,000,000
2026 1,000,000
2027 2,000,000
2028 2,000,000
8,000,000

Required:
a. Prepare a schedule showing the annual amortization of the bond discount using the bond
outstanding method.
b. Prepare journal entries from 2021 to 2024.

3. On December 31, 2021, Star Company sold a 12% serial bond issue with face amount of P7,000,000
for 7,420,000.

The bonds mature in the amount of P1,000,000 on December 31 of each year beginning December
31, 2022 and interest is payable annually.

On December 31, 2023, the entity retired P1,000,000 of bonds due on that date and in addition
purchased at 105 and retired bonds with face amount of P1,000,000 which were due on December
31, 2025.

Required: Prepare journal entries from 2021 to 2023. The bond outstanding method of amortization
is used.

4. Sun Company reported the following financial liabilities on December 31, 2021:

9% debentures, callable in 2022, due in 2023 3,500,000

11% collateral trust bonds, convertible into share capital beginning in 3,000,000
2022, due in 2023
10% debentures, P300,000 maturing annually 1,500,000

Required: Determine the total amount of term bonds.

5. On July 1, 2021, Glocal Company issued at 104, five thousand 10% bonds with face amount of
P1,000 per bond. The bonds were issued through an underwriter to whom the entity paid bond issue
cost of P125,000.

Required: Determine the carrying amount of the bonds payable on July 1, 2021.

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