BM1907

BONDS PAYABLE
NATURE, FEATURES, AND TYPES OF BONDS
A bond is an obligation that arises from a contract known as bond indenture. This represents a promise to pay
a sum of money at the designated maturity date, and periodic interest at a specified rate on its value at the
date of maturity.
In layman’s term, a bond is simply a contract of debt whereby one (1) party (issuer) borrows a certain amount
of money from another party (investor/buyer).
Features of Bonds
• Par value - It refers to the value stated on the face of the bond, which represents the amount the
company or government body promises to pay at the date of maturity.
• Coupon rate - It is the fixed rate of interest, payable to the bondholder.
• Maturity date - It is the date at which the bond gets matured, and the principal amount that is paid
to the bondholder.
• Redemption value - It was the value paid to the bondholder at the time of expiry of the term for which
the bond is issued.
Types of Bonds
• Term bond - It is a bond that matures on a single date.
• Serial bond - It matures in installments instead of a single one.
• Mortgage bond - It is secured by a claim on real properties.
• Collateral trust bond - It is secured by shares and bonds of another entity.
• Debenture bond (Unsecured bond) - It is not backed by any collateral.
• Registered bond - It requires the bondholder to register his/her name in the books of the issuing
entity.
• Coupon or Bearer bond - It is an unregistered bond in the sense that the name of the bondholder is
not recorded on the books of the issuing entity.
• Convertible bond - It can be exchanged for the shares of the issuing entity.
• Callable bond - It can be called in prior to its maturity.
• Guaranteed bond - It is a bond whereby another party promises to pay if the borrower fails to do so.
MEASUREMENT OF BONDS PAYABLE
Initial Measurement
Applying PFRS 9 Financial Instruments, bonds payable that are not designated at fair value shall be measured
initially at fair value less transaction cost, which is directly attributable to the issuance of the said bond.
However, if bonds are designated at fair value through profit or loss, the transaction costs or bond issue costs
shall be treated as an expense immediately.

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

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Subsequent Measurement
Applying the same standard, after initial recognition, bonds payable is measured either:
• At amortized cost, using the effective interest method; or
• At fair value through profit or loss.
BOND ISSUANCES
There are two (2) approaches in accounting for authorization and issuance of bonds, namely (Valix, Peralta, &
Valix, 2015):
• Memorandum Approach - In this approach, no entry is required upon the authorization of the entity
to issue bonds. Authorized bonds payable account is not maintained.
• Journal Entry Approach - In this approach, a journal entry is made to record the authorized bonds
payable.
Illustrative Example 1:
Sprite Company is authorized to issue 10-year term bonds with a par value of P800,000, dated January 1, 2X19,
bearing interest at an annual rate of 10% payable semi-annually on January 1 and July 1, consisting 8,000 units
of P100 par value.

Memorandum Approach
The following memorandum entry is made in the general journal:

“Sprite Company is authorized on January 1, 2X19 to issue P800,000 par value, 10-year 10% bonds, interest
payable semi-annually on January 1 and July 1, consisting 8,000 units of P100 par value.”

Assuming that Sprite decides to issue the bonds on January 1 at par, the entry on its books would be as follows:

Cash 800,000
Bonds payable 800,000

Journal Entry Approach

The authorization of bonds is recorded as follows:

Unissued bonds payable 800,000

Authorized bonds payable 800,000

The subsequent sale of bonds at par is recorded as follows:

Cash 800,000
Unissued bonds payable 800,000

Discounts and Premium

The interest rate that is written in the terms of a bond indenture (and is ordinarily printed on the bond
certificate) is known as the stated, coupon, or nominal rate. This rate, which is set by the bond issuer, is
expressed as a percentage of the bond’s face value, also called the par value, principal amount, or maturity
value (Kieso et. al, 2016).

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If the rate that is required by the investment community (the buyers) is different from the stated rate, when
buyers calculate the bond’s present value, the result will be different from the bond’s face value, and its
purchase price will also differ. The difference between the bond’s face value and its present value is either a
discount or premium (Kieso et. al, 2016).
Illustrative Example 2: Issuance of bonds at a premium
Coca-Cola Company issued a P4,000,000 face value bonds at 104 on January 1, 2X19. In recording this
transaction, the entry on its books would be as follows:

Cash 4,160,000
Bonds payable 4,000,000
Premium on bonds payable 160,000
The quoted price of 104 means “104% of the face value or par value of the bond.” The P4,160,000 (P4,000,000
x 1.04) represents the sales price. Furthermore, the excess of sales price over the face value amounting to
P160,000 represents bond premium—a gain on the part of the issuing entity.
Illustrative Example 3: Issuance of bonds at a discount
RC Company issued a P4,000,000 face value bonds at 94 on January 1, 2X19. In recording this transaction, the
entry on its books would be as follows:

Cash 3,760,000
Discount on bonds payable 240,000
Bonds payable 4,000,000
The P3,760,000 (P4,000,000 x .94) represents the sales price. Furthermore, the excess of face value over the
sales price amounting to P240,000 represents bond discount—a loss on the part of the issuing entity.
Illustrative Example 4: Issuance of bonds at a discount using the effective interest method
Fruit Soda Company issued P100,000 of 8% term bonds on January 1, 2X19, due on January 1, 2X24, with
interest payable on January 1 and July 1. Because the investors required an effective-interest rate of 10%,
they paid P92,728 for the P100,000, creating a P7,722 discount. Fruit Soda computes the P7,722 discount as
follows:

Maturity value of bonds payable P100,000

Present value of P100,000 due in five (5) years at 10% interest, payable semiannually
(61,391)
(P100,000 x .61391)
Present value of P4,000 interest payable semiannually for five (5) years (P4,000 x 7.72173) (30,887)
Net cash receipt from bond issuance P7,722
Illustrative Example 5: Issuance of bonds at interest date
On June 1, 2X19, Root Beer Corporation issued at P2,500,000 face value bonds at 97. The bonds mature in five
(5) years and pay 12% interest semi-annually on June 1 and December 1. In recording this issuance, the entry
on Root Beer Company’s book for 2X19 would be as follows:
On June 1, 2X19:

Cash 2,425,000
Discount on bonds payable 75,000

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Bonds payable 2,500,000

On December 1, 2X19:

Interest expense 150,000

Cash 150,000
Semiannual interest payment
On December 31, 2X19:

Interest expense 25,000

Accrued interest payable 25,000
Interest accrued for one (1) month from December 1 to
December 31, 2X19
On December 31, 2X19:

Interest expense 17,500

Discount on bonds payable 17,500
Amortization of bond discount from June 1 to December 31, 2X19
Illustrative Example 6: Issuance of bonds between interest dates
On March 1, 2X19, Seven Up Corporation issued at 103 plus accrued interest, 1,000 of its 9%, P1,000 bonds.
The bonds are dated January 1, 2X19 and mature on January 1, 2X29. Interest is payable semiannually on
January 1 and July 1. Seven Up paid transaction costs amounting to P5,000.
Based on the given information, how much would Seven Up realize as net cash receipts from bond issuance?
Solution:
Bond issue price (P1,000 x 1,000 x 103%) P1,030,000
Accrued interest (P1,000,000 x 9% x 2/12) 15,000
Bond issue cost (5,000)
Net cash receipt from bond issuance P1,040,000
BOND RETIREMENT
Retirement of bonds refers to the repurchase of bonds that a company had previously issued to its investors.
The issuer retires bonds at the scheduled maturity date of the instruments (Bragg, 2018).

If the bonds are callable, the issuer has the option to repurchase the bonds earlier. Once bonds are retired,
the issuer eliminates the bonds payable liability on its books (Bragg, 2018).
Illustrative Example 7:
On June 30, 2X19, Yakult Company had outstanding 8%, P3,000,000 face value, 15-year bonds maturing on
June 30, 2X26. Interest is payable on June 30 and December 31. The unamortized balances on June 30, 2X19
in the bond discount and deferred bond issue costs were P105,000 and P30,000, respectively. Yakult
reacquired all of these bonds at 94 on June 30, 2X19, and retired them.
How much gain should Yakult report on this early extinguishment of debt?

Retirement Price (P3,000,000 x 94%) P2,820,000

Less: Carrying value of bonds

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Face value P3,000,000

Unamortized bond discount (105,000)
Unamortized bond issue cost (30,000) (2,865,000)
P45,000
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 (Valix, Peralta, & Valix, 2015).
The difference between the acquisition cost and the carrying amount of the treasury bonds is treated as gain
or loss on the acquisition of treasury bonds (Valix, Peralta, & Valix, 2015).
Illustrative Example 8:
Delight Company originally issued P5,000,000 face value bonds at 105 or a premium of P250,000.
Subsequently, the entity reacquired P1,000,000 face value bonds to be placed in the treasury at 103. At the
time of reacquisition, the unamortized premium balance is P200,000, and accrued interest on the treasury
bonds is P30,000, which is paid in cash.
In recording this transaction, the entry on Delight’s book would be as follows:

Treasury bonds 1,000,000

Premium on bonds payable 40,000
Interest expense 30,000
Cash 1,060,000
Gain on acquisition of treasury bonds 10,000

Face value of treasury bonds P1,000,000

Applicable premium (1,000,000/5,000,000 x 200,000) 40,000
Carrying amount 1,040,000
Less: Reacquisition price 1,030,000
Gain on acquisition of treasury bonds 10,000

Reacquisition price P1,030,000

Accrued interest on the bonds 30,000
Total cash payment P1,060,00
BOND REFUNDING
Bond refunding is a premature retirement of the old bonds through issuing new bonds. 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 cancellation of the bond liability
(Valix, Peralta, & Valix, 2015).
However, where refunding is made prior to the maturity date of the old bonds, consideration must be given
to the refunding charges of the old bonds. The refunding charges include the unamortized bond discount or
premium, unamortized bond issue cost, and redemption premium on the old bonds being refunded (Valix,
Peralta, & Valix, 2015).

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References
Bragg, S. (2018). Retirement of bonds. Retrieved June 19, 2019, from
https://www.accountingtools.com/articles/2017/5/10/retirement-of-bonds
Kieso, D. E., Weygandt, J. J., Warfield, T. D., Young, N. M., Wiecek, I. M., & McConomy, B. J. (2016).
Intermediate accounting (11th ed.). Toronto: John Wiey & Sons Canada, Ltd.
Robles, N. S., & Empleo, P. M. (2016). Intermediate accounting (Vol 2.). Mandaluyong: Millenium Books, Inc.
Valix, C. T., Peralta, J. F., & Valix, C. A. (2015). Financial accounting (Vol. 2). Manila: GIC Enterprises & Co.,
Inc.

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