BONDS

PROBLEM NO. 1 (Basic Journal Entries_Straightline method of amortization)

JAMES BOND Co. was authorized to issue 12%, 10-year bonds with face amount of P7,000,000 on April 01, 2020. Interest on the bonds is
payable semi-annually on April 01 and October 01 of each year. The bonds were sold to underwriters on April 01, 2020 at 106. The entity
amortizes discount or premium only at the end of the accounting year, using the straight line method of amortization.

REQUIRED:
1. Prepare journal entries for 2020 and 2021 including adjustments at the end of each year. Use the Memorandum Approach.

2. Present the bonds bayable in the statement of financial position on December 31, 2021 using the Memorandum Approach.

3. Prepare journal entries for 2020 and 2021 including adjustments at the end of each year. Use the Journal Entry Approach.

4. Present the bonds bayable in the statement of financial position on December 31, 2021 using the Journal Entry Approach.

ANSWERS AND EXPLANATIONS (Problem No. 1):

MEMORANDUM APPROACH (Requirement No. 1) JOURNAL ENTRY APPROACH (Requirement No. 3)
April 01, 2020
James Bond Co. was authorized to issue 12%, 10-year bonds with Unissued bonds payable 7,000,000
face amount of P7,000,000. Authorized bonds payable 7,000,000

Explanation: Under the 'memorandum approach", only a narrative memorandum entry is made at the time of approval of the issuance of
the bonds while a formal journal entry is prepared under the "journal entry approach". The "authorized bonds payable" account is credited
under the journal entry approach to indicate the maximum face amount of bonds that can be sold while the "unissued bonds payable"
account is debited upon authorization and credited each time a sale of the bonds is made.

Cash 7,420,000 Cash 7,420,000

Bonds payable 7,000,000 Unissued bonds payab 7,000,000
Premium on bonds payable 420,000 Premium on bonds payable 420,000

Explanation: No accounting issue arises when bonds are sold at face amount. If the selling price of the bonds is higher than its face
amount, a premium is recognized ("premium on bonds payable" account). However, a discount account (discount on bonds payable
account) is recorded if the selling price of the bonds is lower than its face amount. The difference between the selling price or issue price of
the bonds and its face amount is amortized over the life of the bonds using effective interest method, unless a particular method (e.g.
straight line method) is required to be used in the problem.

October 01, 2020

Interest expense 420,000 Interest expense 420,000
Cash 420,000 Cash 420,000

Explanation: Interest expense for 6 months is recognized on October 01, 2020 along with a credit to the "cash" account. The interest for
the 6-month period is computed as follows: Interest = P7,000,000 x 12% x 6/12

December 31, 2020

Interest expense 210,000 Interest expense 210,000
Interest payable 210,000 Interest payable 210,000

Premium on bonds payable 31,500 Premium on bonds payable 31,500

Interest expense 31,500 Interest expense 31,500

Explanation: Interest expense for 3 months (October 01 - December 31) is accrued on December 31, 2020 along with a credit to the
"interest payable" account. The accrued interest computed as follows: Interest = P7,000,000 x 12% x 3/12. The amortization of premium
increases the interest expense for the period and is computed using the straight line method as follows: Amortization = (P420,000 / 10) x
9/12

January 01, 2021

Interest payable 210,000 Interest payable 210,000
Interest expense 210,000 Interest expense 210,000

Explanation: The adjusting entry for the accrued interest on the bonds payable as at December 31, 2020 is reversed on the beginning of
the next accounting period to facilitate the usual recording of transactions and to eliminate the account (interest payable account) created
during the preparation of the adjusting entry.

April 01, 2021

Interest expense 420,000 Interest expense 420,000
Cash 420,000 Cash 420,000
 Explanation: Interest expense for 6 months is recorded on April 01, 2021 along with a credit to the "cash" account. The interest for the 6-
month period is computed as follows: Interest = P7,000,000 x 12% x 6/12

October 01, 2021

Interest expense 420,000 Interest expense 420,000
Cash 420,000 Cash 420,000

Explanation: Interest expense for 6 months is recognized on October 01, 2021 along with a credit to the "cash" account. The interest for
the 6-month period is computed as follows: Interest = P7,000,000 x 12% x 6/12

December 31, 2021

Interest expense 210,000 Interest expense 210,000
Interest payable 210,000 Interest payable 210,000

Premium on bonds payable 42,000 Premium on bonds payable 42,000

Interest expense 42,000 Interest expense 42,000

Explanation: Interest expense for 3 months (October 01 - December 31) is accrued on December 31, 2020 along with a credit to the
"interest payable" account. The accrued interest computed as follows: Interest = P7,000,000 x 12% x 3/12. The amortization of premium
increases the interest expense for the period and is computed using the straight line method as follows: Amortization = (P420,000 / 10).

2/4 MEMORANDUM APPROACH JOURNAL ENTRY APPROACH

Authorized bonds payable - P7,000,000 Authorized bonds payable 7,000,000

Bonds issued and outstanding 7,000,000 Less: Unissued bonds payable -
Add: Premium on bonds payable 346,500 Issued bonds payable 7,000,000
Carrying amount of bonds payable 7,346,500 Add: Premium on bonds payable 346,500
Carrying amount of bonds payable 7,346,500

PROBLEM NO. 2 (Basic Journal Entries_Straightline method of amortization)

JAMES BOND Co. was authorized to issue 10-year, 12% bonds with face amount of P8,000,000. The bonds are dated January 01, 2020 and
interest is payable semi-annually on June 30 and December 31. The bonds were sold as follows:

January 01, 2020 5,000,000 at 95

September 01, 2021 2,000,000 at 103 plus accrued interest

REQUIRED:
1. Journal entries relating to the bonds payable in 2020 and 2021. Straight line amortization is used and Unissued Bonds Payable account is set
up.

2. Statement presentation of the bonds payable as at and for the year ended December 31, 2021.

ANSWERS
2020 2021
January 01, 2020 June 30, 2021
Unissued bonds payable 8,000,000 Interest expense 300,000
Authorized bonds payable 8,000,000 Cash 300,000

Cash (P5M x 95%) 4,750,000 September 01, 2021

Discount on bonds payable 250,000 Cash 2,100,000
Unissued bonds payable 5,000,000 Unissued bonds payable 2,000,000
Premium on bonds payable 60,000
June 30, 2020 Interest expense 40,000
Interest expense (P5M x 6%) 300,000
Cash 300,000 December 31, 2021
Interest expense (P7M x 6%) 420,000
December 31, 2020 Cash 420,000
Interest expense (P5M x 6%) 300,000
Cash 300,000 Interest expense 25,000
Discount on bonds payable 25,000
Interest expense 25,000
Discount on bonds payable 25,000 Premium on bonds payable 2,400
(P250,000/ 10 yrs) Interest expense 2,400
(P60,000 / 100 months x 4 months)
 2 STATEMENT OF FINANCIAL POSITION (12.31.2021) INCOME STATEMENT (2021)
Authorized bonds payable 8,000,000 Interest expense 702,600
Less: Unissued bonds payable 1,000,000
Issued bonds payable 7,000,000
Premium on bonds payable 57,600
Discount on bonds payable (200,000)
Carrying amount of bonds payable 6,857,600

PROBLEM NO. 3 (Retirement of bonds prior to maturity_Straight-line method of amortization)

JAMES BOND Co. was authorized to issue 12% bonds with face amount of P5,000,000 on April 01, 2020. Interest on the bonds is payable semi-
annually on April 01 and October 01. Bonds mature on April 01, 2025. The entire issue was sold on April 01, 2020 at 98 less bond issue cost of
P50,000. On July 01, 2021, bonds of P2,000,000 face amount were purchased and retired at 99 plus accrued interest.

REQUIRED:
1. Journal entries, including any adjustmens, relating to the issuance of the bonds for 2020 and 2021. Use memorandum approach and straight
line method of amortization.

2. Present the bonds payable in the statement of financial position on December 31, 2021.

ANSWERS:
Requirement No. 1
2020 2021 (Continuation)
April 01, 2020 Computation of amortization:
JAMES BOND Co. was authorized to issue 12%, 5-year bonds with face Bond issue cost (P50,000 x 2/5 x 6/60)
amount of P5,000,000 Discount on bonds payable (P100,000 x 2/5 x 6/60)

Cash 4,850,000 Bonds payable 2,000,000

Bond issue cost 50,000 Interest expense 60,000
Discount on bonds payable 100,000 Loss on retirement of bonds 25,000
Bonds payable 5,000,000 Bond issue cost 15,000
Discount on bonds payable 30,000
October 01, 2020 Cash 2,040,000
Interest expense 300,000
Cash 300,000 Computation of total cash payment:
Retirement price (P2,000,000 x 99%) 1,980,000
December 31, 2020 Accrued interest (P2,000,000 x 12% x 3/12) 60,000
Interest expense 150,000 Total cash payment 2,040,000
Interest payable 150,000
Computation of loss on retirement:
Interest expense 22,500 Retirement price (P2,000,000 x 99%) 1,980,000
Bond issue cost 7,500 Face amount of bonds retired 2,000,000
Discount on bonds payable 15,000 Bond issue cost (15,000)
Discount on bonds payable (30,000)
Computation of amortization: Carrying amount of bonds retired 1,955,000
Bond issue cost (P50,000 x 9/60) Loss on retirement of bonds 25,000
Discount on bonds payable (P100,000 x 9/60)
October 01, 2021
2021 Interest expense 180,000
January 01, 2021 Cash 180,000
Interest payable 150,000
Interest expense 150,000 December 31, 2020
Interest expense 90,000
April 01, 2021 Interest payable 90,000
Interest expense 300,000
Cash 300,000 Interest expense 18,000
Bond issue cost 6,000
July 01, 2021 Discount on bonds payable 12,000
Interest expense 6000
Bond issue cost 2,000 Computation of amortization:
Discount on bonds payable 4,000 Bond issue cost (P50,000 x 3/5 x 12/60)
Discount on bonds payable (P100,000 x 3/5 x 12/60)

Requirement No. 2
Bonds payable- face amount 3,000,000
Bond issue cost (P50,000 x 3/5 x 39/60) (19,500)
Discount on bonds payable (P100,000x3/5x39/60) (39,000)
Carrying amount of bonds payable 12/31/2021 2,941,500
Explanations on the retirement of bonds prior to maturity.
1. Amortization of bond issue cost, discount or premium must be updated as at the date of the retirement of the bonds.
2. The difference between the retirement price of the bonds and its carrying amount as at the date of retirement is treated as gain (RP < CA) or
loss (RP > CA) on the retirement of bonds.
3. The retirement price of the bonds, for purposes of determining any gain or loss, should not include any accrued interest on the bonds to be
retired.
4. The carrying amount of the bonds to be retired is equal to the face amount of the bonds retired plus any unamortized premium less any
unamortized discount and bond issue cost.

PROBLEM NO. 4 (Bond outstanding method of amortization)

JAMES BOND Co. issued P8,000,000 12% bonds on December 31, 2020 at 96. Interest is payable annually on December 31.

Bond maturity:
December 31
2022 1,000,000 2025 1,000,000
2023 1,000,000 2026 2,000,000
2024 1,000,000 2027 2,000,000

REQUIRED:
1. Prepare a schedule showing the annual amortization of the bond discount using the "bond outstanding method".
2. Prepare the journal entries from 2020 to 2023.

ANSWERS:
Requirement No. 1 (Amortization Schedule - Bond Outstanding Method)
Outstanding balance at start Interest Paid
Year Fraction Amortization
of the year every 12/31
2021 8,000,000 8/40 64,000 960,000
2022 8,000,000 8/40 64,000 960,000
2023 7,000,000 7/40 56,000 840,000
2024 6,000,000 6/40 48,000 720,000
2025 5,000,000 5/40 40,000 600,000
2026 4,000,000 4/40 32,000 480,000
2027 2,000,000 2/40 16,000 240,000
40,000,000 320,000 4,800,000

Requirement No. 2
December 31, 2020 December 31, 2022 (continuation)
JAMES BOND Co. was authorized to issue 12%, 7-year serial bonds with Interest expense 960,000
face amount of P8,000,000. Cash 960,000

Cash 7,680,000 Interest expense 64,000

Discount on bonds payable 320,000 Discount on bonds payable 64,000
Bonds payable 8,000,000
December 31, 2023
December 31, 2021 Bonds payable 1,000,000
Interest expense 960,000 Cash 1,000,000
Cash 960,000
Interest expense 840,000
Interest expense 64,000 Cash 840,000
Discount on bonds payable 64,000
Interest expense 56,000
December 31, 2022 Discount on bonds payable 56,000
Bonds payable 1,000,000
Cash 1,000,000

PROBLEM NO. 5 (Fair value option of measuring bonds payable)

On January 01, 2020, JAMES BOND Co. issued 6% bonds with face amount of P4,000,000 for net proceeds of P3,677,600, a price that yields
8% interest. Interest is payable annually every December 31. The entity elected the fair value option of measuring bonds. On December 31,
2020, the bonds are quoted at 95.

REQUIRED:
1. Interest expense for the year 2020.
2. Gain or loss from change in fair value for the year 2020.
3. Carrying amount of the bonds as at December 31, 2020.
4. Journal entries for the year 2020.
ANSWERS (Problem No. 5)
Explanations:
1 Interest expense (P4,000,000 x 6%) 240,000 1. When bonds are measured at fair value, the carrying amount of
the bonds at the end of each reporting date is the current fair value
2 Fair value at year-end (P4,000,000 x 95%) 3,800,000 (quotation) of the bonds.
Fair value as at date of issuance 3,677,600
Loss from change in fair value 122,400 2. The gain or loss from change in fair value is reported as follows:

3 Carrying amount of the bonds 12.31.2020 3,800,000 2.1 The portion of the gain or loss related to CREDIT RISK is
reported under "other comprehensive income".
4 Journal Entries
January 01, 2020 2.2 The portion of the gain or loss NOT related to CREDIT RISK
Cash 3,677,600 is reported in "profit or loss".
Bonds payable 3,677,600
3. Interest expense for the period pertains only to the nominal interest
December 31, 2020 since no amortization is made on the purchase difference.
Interest expense 240,000
Cash 240,000

Loss from change in fair value 122,400

Bonds payable 122,400

PROBLEM NO. 6 (Fair value option of measuring bonds payable)

On January 01, 2020, JAMES BOND Co. issued bonds with face amount of P8,000,000 and 10% stated interest rate at 95. The entity paid bond
issue cost of P150,000. The bonds have a 5-year term and insterest is payable annually every December 31. The entity elected the fair value
option in measuring the bonds. On December 31, 2020, the fair value of the bonds is 105.

It is reliably determined that the fair value increased is comprised of P150,000 attributable to credit risk and the remainder is attributable to change
in market interest rate.

REQUIRED:
REQUIRED:
1. Interest expense for the year 2020.
2. Gain or loss from change in fair value for the year 2020.
3. Carrying amount of the bonds as at December 31, 2020.
4. Journal entries for the year 2020.

ANSWERS (Problem No. 6)

1 Interest expense (P8,000,000 x 10%) 800,000 4. Journal Entries (continuation)

2 Fair value at year-end (P8,000,000 x 105%) 8,400,000 December 31, 2020

Fair value as at date of issuance (P8M x 95%) (7,600,000) Interest expense 800,000
Total loss 800,000 Cash 800,000
Portion of the loss attributable to credit risk (150,000)
Portion of the loss reported in profit or loss 650,000 Loss on credit risk (OCI) 150,000
Loss from change in fair value 650,000
3 Carrying amount of the bonds 12.31.2020 8,400,000 Bonds payable 800,000

4 Journal Entries Explanations:

January 01, 2020 1. Transaction costs related to bonds measured at fair value are
Cash 7,600,000 recorded as outright expense.
Bonds payable 7,600,000 2. The portion of the valuation loss recognized at year end that is
attributable to credit risk reported under "other comprehensive
Transaction costs 150,000 income" while the portion related to changes in the market interest
Cash 150,000 rate is reported in "profit or loss".

PROBLEM NO. 7 (Classification of bonds)

James Bond Co. reported the following noncurrent liabilities on December 31, 2020:

Unsecured:
9% registered bond, P250,000 maturing annually beginning in 2021 2,750,000
11% convertible bonds, callable beginning in 2021 due 2022 1,250,000
Secured:
12% guaranty security bonds, due 2022 2,500,000
10% commodity backed bonds, P500,000 maturing annually beginning in 2021 2,000,000
REQUIRED:
1. Total amount of serial bonds as at December 31, 2020.
2. Total amount of debenture bonds as at December 31, 2020.

ANSWERS:
1) 9% registered bond, P250,000 maturing annually beginning in 2021 2,750,000
10% commodity backed bonds, P500,000 maturing annually beginning in 2021 2,000,000
Total serial bonds, December 31, 2020 4,750,000

2) 9% registered bond, P250,000 maturing annually beginning in 2021 2,750,000

11% convertible bonds, callable beginning in 2021 due 2022 1,250,000
Total debenture bonds, December 31, 2020 4,000,000

Explanations: SERIAL bonds are bond securities that mature in series of installments. Bonds that are scheduled to mature on a single date of
maturity are called TERM bonds. DEBENTURE bonds are bonds that are unsecured or without any collateral security.

PROBLEM NO. 8 (Net cash received from the issuance of bonds)

On April 01, 2020. James Bond Co. issued, at 99 plus accrued interest, 4,000 8% bonds with face amount of P1,000 per bond. The bonds are
dated Janury 01, 2020, mature on January 01, 2030 and pay interest on January 01 and July 01. The entity paid bond issue cost of P140,000 at
the time of issuance. How much cash was received from the bond issuance?

Answer:
Issue price for the bonds (4,000 bonds x P1,000 per bond x 99%) 3,960,000
Accrued interest (4,000 bonds x P1,000 per bond x 8% x 3/12) 80,000
Bond issue cost (140,000)
Net cash received from the issuance of the bonds 3,900,000

Explanations:
1. Accrued interest is added to the issue price of the bonds in determining the cash received from the bond issuance. However, accrued interest
is not considered for purposes of determining the amount of premium or discount resulting from bond issuance.
2. Bond issue cost is deducted from the issue price of the bonds in determining the net cash received from the bond issuance. Bond issue cost is
amortized over the credit term following the same approach applied to discount on bonds payable.

PROBLEM NO. 9 (Bond issue costs)

During the current year, James Bond Co. incurred the following costs in connection with the issuance of bonds:

Promotion cost 200,000 Fees paid to independent accountants for

Printing and engraving 150,000 registration information 100,000
Legal fees 800,000 Commissions paid to underwriters 900,000

What total amount should be reported as bond issue cost on the date of issuance?

Answer: Explanations: Bon issue costs are transaction costs directly

Promotion cost 200,000 attributable to the issue of the bonds. Under PFRS 9, bond issue
Printing and engraving 150,000 costs shall be deducted from the issue price of the bonds during the
Legal fees 800,000 initial measurement of the bonds. The bond issue cost is amortized
Fees paid to independent accountants for using the effective interest method of amortization (lumped with
registration information 100,000 discount or netted against premium). However, if bonds are measure
Commissions paid to underwriters 900,000 at fair value, bond issue costs are recorded as outright expenses.
Total bond issue cost 2,150,000

PROBLEM NO. 10 (Retirement of bonds prior to maturity)

On June 30, 2020, James Bond Co. had outstanding 9%, P5,000,000 face value bonds maturing on June 30, 2025. Interest is payable semi-
annually every June 30 and December 31. On June 30, 2020, after amortization was recorded for the period, the unamortized bond premium and
unamortized bond discount were P30,000 aand P50,000, respectively. On that date, the entity acquired all outstanding bonds on the open market
at 98 and retired them. On June 30, 2020, what amount should be recognized as gain on redemption of bonds?

Answer:
Retirement price of the bonds (P5,000,000 x 98%) 4,900,000
Carrying amount of the retired bonds:
Face amount 5,000,000
Unamortized bond premium 30,000
Unamortized bond discount (50,000) 4,980,000
Gain on redemption of bonds (early retirement) 80,000
PROBLEM NO. 11 (Effective interest method of amortization)
James Bond Co. received permission on January 1, 2020 to issue 12% bonds with face amount of P6,000,000 maturing on January 01, 2030.
Interest is payable annually every December 31. The bonds are callable at 102 plus accrued interest. On January o1, 2020, the entity issued the
bonds for P6,737,000 with an effective yield of 10%. The fiscal year of the entity ends every December 31. The effective interest method of
amortization is used.

REQUIRED:
1. Amortization table for the premium amortization.
2. Journal entries relating to the bonds payable for 2020 and 2021
3. Financial statement presentation of the bonds on December 31, 2021.

Answers:
Requirement No. 1 "Nominal" "Effective"
Interest Interest Present
Date Amortization (A-B)
paid (A) expense (B) value/ CA
1/1/2020 6,737,000
12/31/2020 720,000 673,700 46,300 6,690,700
12/31/2021 720,000 669,070 50,930 6,639,770
12/31/2022 720,000 663,977 56,023 6,583,747
12/31/2023 720,000 658,375 61,625 6,522,122
12/31/2024 720,000 652,212 67,788 6,454,334
12/31/2025 720,000 645,433 74,567 6,379,767
12/31/2026 720,000 637,977 82,023 6,297,744
12/31/2027 720,000 629,774 90,226 6,207,518
12/31/2028 720,000 620,752 99,248 6,108,270
12/31/2029 720,000 611,730 108,270 6,000,000

Explanations:
1. The nominal rate (12%) is the stated rate on the face of the bond instrument. Nominal rate is used in determining the interest payment per
interest period or the amount of interest accrued at end of the year. Nominal interest is determined by multiplying the face amount of the bonds by
the nominal rate of interest.
2. The effective rate (10%) is the actual interest incurred on the bonds. It is sometimes referred to as the yield rate or the market rate of interest.
Effective interest is computed by multiplying the immediately preceding present value (carrying amount) of the bonds by the effective rate of interest.

3. Discount on bonds payable is recognized when the effective rate of interest is higher than the nominal rate of interest. Premium on bonds
payable is recognized if the nominal rate is higher than the effective rate of interest. If bonds are issued at face amount, effective rate of interest is
equal to the nominal rate of interest on the bonds.
4. The premium amortization (difference between the effective interest and nominal interest) is deducted from the previous carrying amount in
determining the carrying amount as at the end of the current reporting period. Premium amortization decreases both the interest expense
recognized during the period and the subsequent carrying amount of the bonds.

Requirement No. 2 (Journal entries)

January 01, 2020 December 31, 2020 (Continuation)
James Bond Co. was authorized to issue 12%, 10-year bonds with Alternatively, the entry for the interest payment and premium
face amount of P6,000,000. amortization may be prepared as follows:

Cash 6,737,000 Interest expense 673,700

Bonds payable 6,000,000 Premium on bonds payable 46,300
Premium on bonds payable 737,000 Cash 720,000

December 31, 2020 December 31, 2021 (Continuation)

Interest expense 720,000
Cash 720,000 Interest expense 669,070
Premium on bonds payable 50,930
Premium on bonds payable 46,300 Cash 720,000
Interest expense 46,300

Requirement No. 3 (FS presentation)

Bonds payable 6,000,000
Unamortized premium on bonds payable 639,770
Carrying amount of bonds payable 12.31.21 6,639,770

PROBLEM NO. 12 (Effective interest method of amortization)

James Bond Co. issued, in a private placement with an investment house, P3,000,000 face amount of 3-year, 16% bonds. Interest is payable
semi-annually on June 30 and December 31 of each year. The bonds were issued on January 01, 2020 at a price yielding the entity P2,738,682
which represents an effective interest of 20% per year. The bonds mature on January 01, 2023.

REQUIRED:
1. Amortization table for the discount amortization.
2. Journal entries relating to the bonds payable for the years 2020 to 2023
Answers:
Requirement No. 1 "Nominal" "Effective"
Interest Interest Present
Date Amortization (A-B)
paid (A) expense (B) value/ CA
1/1/2020 2,738,682
6/30/2020 240,000 273,868 33,868 2,772,550
12/31/2020 240,000 277,255 37,255 2,809,805
6/30/2021 240,000 280,981 40,981 2,850,786
12/31/2021 240,000 285,079 45,079 2,895,864
6/30/2022 240,000 289,586 49,586 2,945,451
12/31/2022 240,000 294,549 54,549 3,000,000

Requirement No. 2 (Journal entries)

January 01, 2020 December 31, 2021
James Bond Co. was authorized to issue 16%, 3-year bonds with Interest expense 285,079
face amount of P3,000,000. Discount on bonds payable 45,079
Cash 240,000
Cash 2,738,682
Discount on bonds payable 261,318 June 30, 2022
Bonds payable 3,000,000 Interest expense 289,586
Discount on bonds payable 49,586
June 30, 2020 Cash 240,000
Interest expense 273,868
Discount on bonds payable 33,868 December 31, 2022
Cash 240,000 Interest expense 294,549
Discount on bonds payable 54,549
December 31, 2020 Cash 240,000
Interest expense 277,255
Discount on bonds payable 37,255 January 01, 2023
Cash 240,000 Bonds payable 3,000,000
Cash 3,000,000
June 30, 2021
Interest expense 280,981 Explanations: The amortization of discount increases both the
Discount on bonds payable 40,981 interest expense for the period and the subsequent carrying amount
Cash 240,000 of the bonds payable.

PROBLEM NO. 13 (Effective interest method of amortization applied to serial bonds)

On December 31, 2020, James Bond Co. issued P4,000,000, 8% serial bonds, to be repaid in the amount of P800,000 each year. Interest is
payable annually on December 31. The bonds were issued to yield 10% per year. The bond proceeds totaled P3,805,600 based on the present
value of December 31, 2020 of the annual payments of principal and interest.

1. Amortization table for the discount amortization.

2. Journal entries relating to the bonds payable for the years 2020 and 2021.
3. Carrying amount of the bonds on December 31, 2021

ANSWERS:
Requirement No. 1 "Nominal" "Effective"
Annual Interest Interest Amortization Present
Date
payment paid (A) expense (B) (A-B) value/ CA
12/31/2020 3,805,600
12/31/2021 800,000 320,000 380,560 60,560 3,066,160
12/31/2022 800,000 256,000 306,616 50,616 2,316,776
12/31/2023 800,000 192,000 231,678 39,678 1,556,454
12/31/2024 800,000 128,000 155,645 27,645 784,099
12/31/2025 800,000 64,000 79,901 15,901 -

Requirement No. 2 (Journal entries) Requirement No. 3 (Carrying amount of bonds payable)
December 31, 2020 Bonds payable, 12/31/2021 3,200,000
James Bond Co. was authorized to issue 8%, 5-year serial bonds Unamortized discount (194,400 - 60,560 ) (133,840)
with face amount of P4,000,000. Carrying amount of bonds payable 12/31/21 3,066,160

Cash 3,805,600
Discount on bonds payable 194,400 Explanations: The nominal interest for serial bonds decreases
Bonds payable 4,000,000 annually because of the scheduled reduction in the face amount of
the bonds per year.
December 31, 2021
Interest expense 380,560
Discount on bonds payable 60,560
Cash 320,000