BONDS PAYABLE

Illustrative 1: Given the following data, determine the issue price of the bonds on January
1, 2020:
CASE 1:
Face amount of the bonds P3,000,000
Date of issue of bonds January 1, 2020
Nominal Rate (annual) 8% - 4% semiannual (premium, kasi NR > ER)
Effective Rate (annual) 6% - 3% semiannual
Semiannual Interest June 30 and December 31
Date of Maturity January 1, 2022 (2 years x 2(semiannual) = 4 periods)
Issue price:
Kapag nagcocompute ng PVF, always effective rate ang gagamitin
Principal 3,000,000 x 0.8885 (PV of 1) = 2,665,500
Interest paid (3M x 4%) 120,000 x 3.7171 (PV at ord. ann of 1) = 446,052

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hindi na ittimes sa 6/12 dahil nakahati na yung 4% 3,111,552 – PV

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~est. round off PV factors

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Proof na may premium: PV>face amount

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Exact amount: don’t round off PV factors
Alternative: rs e
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(Get the diff of rates)
Nom. Rate 4%
Eff. Rate 3%
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4% - 3% = 1% x 3,000,000 = 30,000 x 3.7171 = 111,513 + 3M = 3,111,513

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Difference of 39 pero insignificant. Para walang difference, don’t round off PV factors
CASE 2:
Face amount of the bonds P3,000,000
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Date of issue of bonds January 1, 2020

Nominal Rate 6% - 3% (discount NR < ER)
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Effective Rate 8% - 4%
Semiannual Interest June 30 and December 31
Date of Maturity January 1, 2025 (5 yrs x 2 = 10 periods)
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3M x 3% = 90,000 (interest payment every period)

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Principal 3,000,000 x 0.6755 = 2,026,800

Interest 90,000 x 8.1109 = 729,981
2,756,781 issue price
sh

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 CASE 3
Face amount 6,000,000
Annual installment every Dec. 31 2,000,000
Date of issue January 1, 2020
NR payable annually every Dec. 31 12%
Effective interest rate 14%
6M/2M = period of 3 years
NR < ER ~ discount
Principal Interest Total
December 31, 2020 2,000,000 + 720,000 (6Mx12%) = 2,720,000 x 0.8772 = 2,385,984
2021 2,000,000 + 480,000 (4Mx12%) = 2,480,000 x 0.7695 = 1,908,360
2022 2,000,000 + 240,000 (2Mx12%) = 2,240,000 x 0.6750 = 1,512,000

5,806,344

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CASE 4

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Face amount of the bonds 3,000,000
Date of issue of bonds January 1, 2020

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Date of sale of bonds April 1, 2020
Nominal Rate rs e 6% - 3%
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Effective Rate 8% - 4%
Semiannual interest January 1 and July 1
Date of Maturity January 1, 2025 5 yrs x 2 = 10 periods
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Int paid (semiannually) 3M x 3% = 90,000

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PV, 1/1/2020
Principal 3,000,000 x 0.6756
Interest 90,000 x 8.1109
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2,756,781 (3,000,000 x 0.6756 = M+ 90,000 x 8.1109 = M+ MR)

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PV, 4/1/2020 (3 mos.)

interest paid 3,000,000 x 3% x 3/6 (dahil yung 3% ay for 6 mos, 3 mos lang ang iccoumpute)
= 45,000
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Interest exp. 2,756,781 x 4% x 3/6

= 55,136L
Th

Discount amortization: 55,136 – 45,000 = 10,136

Present value – initial measurement (4/1/2020)
2,756,781 + 10,316 = 2,799,917 – initial meas. Of bonds
sh

Kapag proceeds: FV + Acc interest

2,766,917 + 45,000 = 2,811,917

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 Illustrative 2: On January 1, 2021, Pepper Company received P1,077,200 for P1,000,000 face
amount 12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually every
January 1 and July 1.
The entity has elected the fair value option for measuring the financial liability
On December 31, 2021, the fair value of the bonds is determined to be P1,064,600 due to
market and interest factors.
Required:
1. What is the carrying amount of the bonds payable on January 1, 2021?
a. 1,000,000 b. 1,077,200 c. 500,000 d. 538,600
- fair value or proceeds
2. What is the interest expense for 2021?
a. 120,000 b. 100,000 c. 107,720 d. 129,264
int exp = 1,000,000 x 12%

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3. What is the gain or loss from change in fair value of the bonds for 2021?

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a. 64,000 gain b. 64,000 loss c. 12,600 gain d. 12,600 loss

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1,077,200 – 1,064,600 = 12,600 gain (dahil nagdecrease ang fair value)

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4. What is the carrying amount of the bonds payable on December 31, 2021?

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rs e
a. 1,064,600 b. 1,077,200 c. 1,000,000 d. 1,064,920
- fair value
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x Fair value option
Illustrative 3: Pikachu Corp. issued P10,000,000 of 10% (nominal rate) bonds on January 1,
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2026. The prevailing market rate of interest for similar type of securities was at 12% (effective
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rate) on the date of issue. The bonds will mature on December 31,2028 (3 yrs). Interests are
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being paid annually every December 31.

REQUIRED:
1. Compute for the total proceeds from the bond issuance
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Principal 10,000,000 x 0.71178

Int (10Mx10%) 1,000,000 x 2.40183
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9,519,630 PV, 1/1/2026

2. Prepare an amortization table
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Date Interest Paid Interest Amortization Carrying Amount

Expense
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1/1/2026 9,519,630
12/31/2026 1,000,000 1,142,356 142,356 9,661,986
12/31/2027 1,000,000 1,159,438 159,438 9,821,424
sh

12/31/2028 1,000,000 1,178,571 178,571 10,000,000

* unamortized discount
12/31/26 10,000,000 – 9,661,986 = 338,014
12/31/27 10,000,000 – 9,821,424 = 178,576

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 3. Assuming the bonds are retired at maturity date, prepare the necessary journal entry.
Bonds Payable 10,000,000
Cash 10,000,000
4. Assuming the bonds are retired on October 1, 2027, prepare the necessary journal
entry. (Retirement price is @99)
CA, 10/1/2027 (12/31/2026) = 9,661,986 + disc amort (1/1/2027 to 10/1/2027 – 9 mos.)
Disc amort (difference of int exp. & int. paid)
Int exp 10,000,000 x 10% x 9/12 = 750,000
Int paid 9,661,986 x 12% x 9/12 = 869,579
Disc amort 119,579

CA, 10/1/2027 9,661,986 + 119,579 = 9,781,565

Ret price = 10M x 99%

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= 9,900,000

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CA vs RP

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9,781,565 < 9,900,000

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= Loss 118,485
rs e
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10/1/2021 unamortized discount
10,000,000 - 9,781,565 = 218,435
Bonds payable 10,000,000
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Loss on ret 118,435

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Disc on BP 218,435
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Cash 9,900,000
Illustrative 4: Pepper Company sells its P1,000,000 face value, five year, 12% bonds on
January 1, 2028. The bonds were sold at 110. Bond issue costs of 24,024, consisting of
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promotions, engraving, printing, and underwriter’s commission, were incurred and paid by the
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company. Effective interest rate after considering the bond issue costs is 10%.
Proceeds = 1M x 110% = 1,100,000
Bond issue costs = deducted from fair value to compute the initial CA of bonds (if not selected
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the FV option)
Th

Required:
1. How much is the initial carrying amount of the bonds?
Initial CA: 1,100,000 – 24,204 = 1,075,796
sh

2. How much is the interest expense for the year 2028?

Int Exp = 1,075,796 x 10% = 107,580
3. How much is the unamortized premium (including bond issue cost) at the end of 2028?
CA – face amount

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 1,063,376 – 1,000,000
= 63,376

4. How much is the carrying amount of the bonds on December 31, 2028?
CA, end = CA, beg – prem. Amort (int exp – int. paid) 107,580 – (1M x12%) = 12,420
= 1,075,796 – 12,420
= 1,063,376
Serial bonds
Illustrative 5: Pepper Company issued a P6,000,000, 12% bonds on January 1, 2028. The
principal of the bonds is paid in series of P2,000,000 annually, together with any accrued
interest on the outstanding bonds, each December 31, starting December 31, 2028. The
effective interest rate on the date of issuance is 10%
REQUIRED:
1. Compute for the total proceeds from the bond issuance

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Principal interest total PV of 1 PV, 1/1/2028

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12/31/2028 2,000,000 + 720,000 (6M x 12%) = 2,720,000 x 0.9091 6,205,136
12/31/2029 2,000,000 + 480,000 (4M x 12%) = 2,480,000 x 0.8264 (premium, mas

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12/31/2030
rs e
2,000,000 + 240,000 (2M x 12%) = 2,240,000 x 0.7513 mlaki sa face)
2. Prepare an amortization table
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Date Payment Interest (10%) Principal Carrying Amount
1/1/2028 6,205,136
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12/31/2028 2,720,000 620,514 2,099,486 4,105,650

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12/31/2029 2,480,000 410,565 2,069,435 2,036,215

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12/31/2030 2,240,000 203,622 2,036,378 0

ed d
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