FAR 2: BONDS PAYABLE

Illustration 1: On March 1, 2019, bonds with a face amount of P5,000,000 are issued for P4,730,000.
The bonds are dated March 1,2019 and matures in 5 years and pay 12% interest semiannually on March 1 and September 1.
• Straight-line method is used in amortization
• All bonds are retired on July 1, 2022.

Illustration 2: Treasury Bonds

An entity issued bonds with a face amount of P5,000,000 at 105.
• Subsequently the entity reacquired P1,000,000 face amount to be place in treasury at 103.
• At the time of reacquisition, unamortized premium is 200,000
• Accrued interest on treasury bonds is P30,000 paid in cash.

A. Treasury bonds are reissued at 102.

B. Treasury bonds are reissued at 90.

Illustration 3: Bond Refunding

• Issuance of new 10-year 10% bonds, with face amount P1,500,000 for P1,600,000.
• Refunding of old 12% bonds, with remaining life of 4 years at 102.
Bonds payable 1,000,000
Discount on BP 30,000

Illustration 4: Bonds Outstanding

Face Amount: P5,000,000
Issue Price: P5,300,000
Annual installment every Dec 31 P1,000,000
Date of issuance of bonds: Jan 1, 2022
Nominal rate: 12%
Interest is payable semi-annually: June 30 & Dec 31

Illustration 5: On January 1, 2019, an entity issued bonds with a face amount of P5,000,000 and 12% stated rate for P5,379,100. The
bonds are sold to yield 10%. Interest is payable annually on Dec 31. The entity paid bond issue cost of P100,000. On December 31, 2019
the fair value of the bonds is determined to be P5,300,000.
The entity elected Fair value option on measuring the bonds payable.

Illustration 6: On January 1, 2019, an entity issued bonds with a face amount of P5,000,000 and 10% stated rate for P4,800,000.
• Bond is 5-year term and interest is payable annually
• The entity elected Fair value option on measuring the bonds payable
• On December 31, 2019 the fair value of the bonds is P5,500,000
• Fair value increased of 700,000 is compromised of P200,000 attributable to the credit risk and P500,000 attributable to the
change in the market interest rate.

EXAMPLE 1: Daisy Company has the following cost in connection with the issuance of bonds:
Promotion Cost 200,000
Printing & engraving 150,000
Legal Fees 800,000
Fees paid to CPA for registration 100,000
Commission to underwriter 1,500,000
QUESTION: Bond issue cost to be amortized over the term of bonds?

EXAMPLE 2: On June 1, 2018, Flow G issued at 99, five thousands bond of 8%, P1,000 face amount.
The bonds were issued through underwriter to whom the entity paid bond issue cost of 425,000.
QUESTION: What should be reported as bond liability?
EFFECTIVE INTEREST RATE METHOD

ILLUSTRATION 1: On January 1, 2019, an entity issued two-year 8% bonds with face amount of P1,000,000 for P964,540, a price which will
yield a 10% effective interest cost per. Interest is payable semi-annually every June 30 and December 31.

ILLUSTRATION 2: On January 1, 2019, an entity issued three-year 12% bonds with face amount of P1,000,000 for P1,049,740, a price
which will yield a 10% effective interest cost per. Interest is payable annually every December 31.

ILLUSTRATION 3:
i. What is the amount of proceeds from bonds?
Face Amount: P4,000,000
Date of issuance of bonds: Jan 1, 2022
Nominal rate: 6%
Effective rate: 8%
Annual interest: Dec 31
Date of Maturity: Dec 31, 2025

ILLUSTRATION 4:
i. What is the carrying amount of bond?
Face Amount: P5,000,000
Date of issuance of bonds: Jan 1, 2022
Nominal rate: 12%
Effective rate: 10%
Semiannual interest: June 30 & Dec 31
Date of Maturity: Dec 31, 2024

ILLUSTRATION 5:
Face Amount: P4,000,000
Date of issuance of bonds: Jan 1, 2022
Nominal rate: 6%
Effective rate: ?
Annual interest: Dec 31
Date of Maturity: Dec 31, 2023
Proceeds of Bonds is: 3,850, 000

ILLUSTRATION 6:
On Jan 1, 2018, WavU company issued 12% serial bonds in face amount of P3,000,000, to be repaid in the amount of P1,000,000 each
year. Interest is payable annually on December 31.
The bonds were issued to yield at 10%.
The bond proceeds is?
PROBLEMS: