Professional Documents
Culture Documents
Bonds Payable - Part 2
Bonds Payable - Part 2
A. LESSON PREVIEW/REVIEW
B. MAIN LESSON
Bond Refunding
➢ refers to issuance of new bonds, the proceeds from which are used to retire existing outstanding bonds.
➢ usually have lower interest than the replaced bonds.
➢ the difference between retirement price ad carrying amount is recognized as gain or loss in profit or
loss.
Illustration: On January 1, 20x1, ABC Co. issued new bonds with face amount of P10,000,000 for
P10,800,000. ABC used the proceeds to retire an existing 10-year, 12%, P8,000,000 bonds issued five years
earlier. The unamortized discount on the existing bonds is P340,000. ABC retired the bonds at a call premium
of P400,000. ABC incurred P50,000 direct costs of retirement. ABC’s income tax is 30%.
Serial Bonds – are bonds in which the principal matures in installments. The periodic payments on serial bonds
consist of payments for both interest and principal.
Illustration: On January 1, 20x1, ABC Co. issued 10% P3,000,000 bonds for P2,900,305. The principal
matures in three equal annual installments, payable at each year-end, plus interest on the outstanding principal
balance. The effective interest rate is 12%.
Convertible Bonds
➢ bonds that are converted into shares of stock of the issuer.
➢ issued both debt instruments for bonds payable and equity instruments for the equity conversion
feature.
➢ To compute for the equity component, the basic accounting procedure is Cash proceeds from
issuance of compound interest less Fair value of debt component without the equity feature
Illustration: On January 1, 20x1, ABC Co. issued 10% P3,000,000 convertible bonds at face amount. Each
P1,000 bond is convertible into 8 shares with par value of P100 per share. On issuance date, the bonds were
selling at 98 without the conversion option. ABC incurred P50,000 transaction costs on the issuance.
Initial measurement:
The issue price is allocated to the liability and equity components as follows:
Issue price 1,000,000
Fair value of debt instrument w/o equity feature (1M x 98%) (980,000)
Equity component 20,000
Skill-Building Activity
1. For a bond issue which sells for less than its par value, the market rate of interest is
a. Dependent on rate stated on the bond.
b. Equal to rate stated on the band.
c. Less than rate stated on the bond.
d. Higher than rate stated on the bond.
2. The market price of a bond issued at a discount is the present value- of its principal amount at the market
(effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.
3. The issue price of a bond is equal to the present value of the future cash flows for interest and principal
when the bond is issued
At face amount At a discount At a premium
a. Yes No Yes
b. Yes No No
c. No Yes Yes
d. Yes Yes Yes
4. Kenwood Co. neglected to amortize the premium on outstanding ten-year bonds payable. What is the effect
of the failure to record premium amortization on interest expense and bond carrying value, respectively?
a. Understate; understate c. Overstate; overstate
b. Understate; overstate d. Overstate; understate
5. On March 1, 2021, Clark Co. issued bonds at a discount. Clark incorrectly used the straight-line method
instead of the effective interest method to amortize the discount. How were the following amounts, as of
December 31, 2021, affected by the error?
Bond carrying amount Retained earnings
a. Overstated Overstated
b. Understated Understated
c. Overstated Understated
d. Understated Overstated
1. In Blue Corp.'s December 31, 2021, balance sheet contained the following items in the long-term
liabilities section:
9% registered debentures, callable in 2022, due in 2027 700,000
9% collateral trust bonds, convertible into common
stock beginning in 2030, due in 2040 600,000
10% subordinated debentures (P30,000 maturing
annually beginning in 2027) 300,000
2. Hancock Co.'s December 31, 20x0, balance sheet contained the following items in the long-term
liabilities section:
Unsecured
9.375% registered bonds (P25,000 maturing annually
beginning in 20x4) 275,000
11.5% convertible bonds, callable beginning in 20x9, due 2x10 125,000
Secured
9.875% guaranty security bonds, due 2x10 250,000
10.0% commodity backed bonds (P50,000 maturing
annually beginning in 20x5) 200,000
What are the total amounts of serial bonds and debenture bonds?
Serial bonds Debenture bonds
a. 475,000 400,000
b. 475,000 125,000
c. 450,000 400,000
d. 200,000 650,000
3. During 20x9, Lake Co. issued 3,000 of its 9%, P1,000 face value bonds at 1011/2. In connection
with the sale of these bonds, Lake paid the following expenses:
Promotion costs P 20,000
Engraving and printing 25,000
Underwriters' commissions 200,000
What amount should Lake record as bond issue Costs to be amortized over the term of the bonds?
a. 0 b. 220,000 c. 225,000 d. 245,000
4. On July 1, 20x7, Day Co received P103,288 for P100,000 face amount, 12% bonds, a price that
yields 10%. Interest expense for the six months ended December 31, 20x7, should be
a. 6,197 b. 6,000 c. 5,164 d. 5,000
5. On January 2, 20x1, West Co. issued 9% bonds in the amount of P500,000, which mature on
January 2, 2x11, The bonds were issued for P469,500 to yield 10%. Interest is payable annually on
December 31. West uses the effective interest method of amortizing bond discount. In its June 30,
20x1, balance sheet, what amount should West report as bonds payable?
a. 469,500 b. 470,475 c. 471,025 d. 500,000
C. LESSON WRAP-UP
Summary / Frequently Asked Questions
1. What are reason why some will buy a bond at premium?
A person would buy a bond at a premium (pay more than its maturity value) because the bond's stated interest
rate (and therefore its interest payments) are greater than those expected by the current bond market. It is also
possible that a bond investor will have no choice
What are the questions/thoughts you want to share to your teacher today?
________________________________________________________________________________________
________________________________________________________________________________________
Answer Key
Skill-Building
1. D
2. C
3. D
4. C
5. C