BONDS PAYABLE

Rei Marian D. Leynes

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
principal sum is paid.
 P200,000
10%
January 1, 2025

Bond

P 1M

Issuer Investors
(Debtor) (Creditor)
A bond is evidence by a certificate
and the contractual agreement
between the issuer and investor is
contained in a document known as
“Bond Indenture”.
CLASSIFICATION
z
OF BONDS

• Term Bonds single date of maturity

• Serial Bonds series of maturity date

• Mortgaged Bonds secured by mortgaged on real property

• Collateral Trust Bonds secured by shares and bonds

• Debenture Bonds unsecured

• Registered Bonds registered name of the bond holder

• Coupon/ Bearer bonds unregistered

CLASSIFICATION
z
OF BONDS

• Convertible can be exchanged for shares

Bonds
• Callable Bonds maybe called in prior to maturity date

• Guaranteed another party promises to pay if the borrower

Bonds fails to do so

• Junk Bonds high-risk, high-yield

• Zero-coupon no interest but with deep discount from the

Bonds face amount
MEASUREMENT

Initially Subsequently
Not designated at FV-P/L FV- TC* Amortized Cost

Designated at FV-P/L FV FV
*Transaction Cost= Bonds Issuance Cost (BIC)
ACCOUNTING
FOR BONDS
a. Memorandum Method
b. Journal Entry Method
1 ISSUANCE
OF BONDS
Journal Entry Method
2

3
1

PAYMENT OF
3 INTEREST

4
AMORTIZATION

1 DISCOUNT Addition to
interest expense

2 PREMIUM Reduction in
interest expense
 12

RETIREMENT OF
BONDS PAYABLE
1

Bond Retirement

2 Prior to Maturity Date

 14

Bond Refunding
• Is a premature retirement of the old bonds by means of
issuing new bonds

Old New

refinance
 15

Treasury Bonds

• Are entity’s own bond

originally issued and
reacquired but not
cancelled

Presentation
Bonds Payable xxx
Less: Treasury Bond xxx
Bonds Payable, issued and outstanding xxx
 PRESENTATION

Non-Current Liabilities

Note: Bond Issue Cost

“Lumped” with discount
“Netted” with premium
BOND
AMORTIZATION
a. Straight Line Method
PFRS 9 requires the use of the
b. Bonds Outstanding Method effective interest method in
c. Effective Interest Method amortizing bond discount or
premium and bond issue cost
 18

STRAIGHT LINE METHOD

The procedure is simply to divide the amount of premium or
discount on bonds payable by the life of the bonds to arrive
at the periodic amortization.

Bonds Payable 8,000,000

Premium on Bonds Payable 500,000
Term 5 years

Amortization
= 500,000/5
=100,000
 19

BOND OUTSTANDING METHOD

It is based on the theory that interest expense shall decrease
every year by reason if the decreasing principal bond liability.

Bonds Payable 5,000,000

Premium on Bonds Payable 500,000
Term 5 years

Year Bond Outstanding Fraction Amortization

1 5,000,000.00 5/15 166,666.67

2 4,000,000.00 4/15 133,333.33

3 3,000,000.00 3/15 100,000.00

4 2,000,000.00 2/15 66,666.67

5 1,000,000.00 1/15 33,333.33

15,000,000.00 500,000.00
 20

EFFECTIVE INTEREST METHOD

This method distinguishes two kinds of interest rate, namely
the nominal rate and effective rate.

Interest Expense

Carrying Amount x Effective Rate

Interest Paid

Face Amount x Nominal Rate

Carrying Amount (amortized cost)

Preceding carrying amount plus the discount amortization/

less premium amortization
 21

EFFECTIVE INTEREST METHOD

On January 1, 2021, an entity issued two-year 8% bonds payable with
face amount of P1,000,000 for P964,540, a price which yield a 10%
effective interest cost per year. Interest is payable semiannually on June
30 and December 31.

Interest Paid Interest Expense Discount Carrying

Date 4% 5% Amortization Amount

Jan 1, 2021 964,540.00

Jun 30, 2021 40,000.00 48,227.00 8,227.00 972,767.00

Dec 31, 2021 40,000.00 48,688.00 8,638.00 981,405.00

June 30, 2022 40,000.00 49,070.00 9,070.00 990,475.00

Dec 31, 2022 40,000.00 49,525.00 9,525.00 1,000,000.00

COMPOUND FINANCIAL
INSTRUMENT
Financial instrument that contains both a
liability and equity element from the
perspective of the issuer
a. Bonds Payable issued with share warrants
Characteristics Financial Instrument:
a. Contract
b. At least two parties
c. Contract gives rise to financial asset
of one entity and financial
liability/equity of another entity

b. Convertible Bonds
 23

ACCOUNTING FOR
COMPOUND INSTRUMENT
Split Accounting

The consideration received from the issuance of the

compound financial instrument shall be allocated
between the liability and equity components

Liability 1st FV Issue Price xxx

FV of Liability xxx

Equity Residual Residual- Equity Component xxx

BONDS PAYABLE WITH SHARE
WARRANTS

SHARE WARRANTS Allocation:

Right to acquire shares of the issuing
entity at a specified price at some
future time
1. Market Value of Bonds ex-
warrants, if not given, Present
Value
2. Residual to warrant whether
detachable or non-detachable

Bonds

Warrants

Issuer Investor
CONVERTIBLE BONDS PAYABLE

CONVERTIBLE BONDS Allocation: Issuance date

Are bonds which gives the holders the
right to convert their bondholdings
into share capital or other securities of
the issuing entity within a specified
period of time
1. Market Value w/o conversion
privilege, if not given present
value of principal and interest
payment
2. Residual to share premium-
conversion privilege

Bond
conversion
privilege

Issuer Investor
 26

ACCOUNTING ISSUES:

o ORIGINAL ISSUANCE

o CONVERSION
• Before maturity
• At maturity
• Not converted

Eliminate B/P including

premium or discount
 FAIR VALUE
OPTION- BONDS
PAYABLE
 28

FAIR VALUE OPTION

• At INITIAL recognition bonds payable may be irrevocably
designated as at Fair Value through profit or loss

Initially Subsequently

Measurement FV FV

Effects
• No amortization needed (no premium/discount)
• Interest Expense is based on nominal rate
• Transaction cost are not capitalized (expense outright)
• Bonds Payable account is not recorded at face but at fair
value
 29

PROFORMA ENTRIES

@ FV

Expense

Nominal
Rate

Changes
in FV
 ACCOUNTING FOR GAIN OR LOSS ON FINANCIAL
LIABILITY DESIGNATED AT PROFIT OR LOSS

Credit Risk (OCI) Credit Risk

- Is the risk that the issuer of
GAIN OR LOSS ON the liability would cause a
CHANGE IN FMV financial loss to the other
Residual (P/L) party by failing to discharge
the obligation

Proforma Entries

Retained
Earnings

Exemption to the Exemption

• 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 of changes in in
credit risk are recognized in profit or loss
 31

THANK YOU!