CA 51010 – INTERMEDIATE ACCOUNTING 2

FINANCIAL LIABILITIES P-2

Bonds Payable

Learning Outcomes:
1. Describe the nature of bonds
2. Classify the bonds
3. Approximate the issue price of bonds
4. Journalize the issuance of bonds, accrual of interest and discount and premium amortization
5. Journalize the early retirement of bonds and settlement on maturity date
6. Compute the FS elements relating to bonds at the end of the reporting period

Bonds – are certificates of indebtedness issued in denominations

- are fixed income instruments that represent loans made by an investor to a borrower
(typically corporate or governmental)

Characteristics:
1. Face value - P12M
2. Coupon rate /stated or nominal int rate - 10% (base for accrual of int expense)
3. Coupon dates - annually at each year end; dec 31
4. Maturity date - dec 31, 2022
5. Issue price - 105

Ex. On January 1, 2020, A Co. issued a 10%, 3-year P12M bonds at 105, interest payments are made
annually at each year-end

issue price = P12,000,000 x 1.05 = P 12.6M

x
premium : issue price > face value
discount : issue price < face value

Classifications:
1. Term and Serial Bonds
Term - single maturity date
Serial - several maturity dates

2. Registered and Coupon/Bearer Bonds

Registered - registered in the legal owner’s name
- hindi basta basta matatransfer sa iba
Bearer - name of the legal owner is not registered with the bonds

3. Secured and Unsecured Bonds

Secured - w/ security or collateral
Unsecured

4. Convertible and Redeemable/Callable Bonds

Convertible
Collable

Approximating the Issue Price of Bonds

pag walang issue price ang ginagamit market interest rate
Market Factors
● Risks in the business or environment
 ● Current interest rates of similar instruments and expected interest rates

Entity-Specific Factors
● Credit image of the issuing corporation

● Financial performance of issuing corporation

nominal = inooffer na interest rate

market = prevailing = effective
10% 8% attractive
Nominal > Market Rate – bonds are expected to be sold above the face value (premium on bonds
payable)
Cash xx
Bonds payable xx
Premium on bonds payable xx adjunct account +

Market > Nominal Rate – bonds are expected to be sold below the face value (discount on bonds
payable)
Cash xx
Discount on bonds payable xx contra -
Bonds payable xx

Issue Price – is the present value of principal and interest payments

- face value + premium - discount

Discount Rate – is the market rate at date of the issue

Illustration 1: A P10M 10% 5-year bond is issued on January 1, 2021. Interest is payable annually every
December 31.

Required: Prepare the journal entries to record the issuance of bond on January 1, 2021, payment of
interest and amortization of premium/discount on December 31, 2021 under the following
assumptions:
1. The market rate on January 1, 2021 is 5%.
2. The market rate on January 1, 2021 is 12%.

Illustration 2: A P10M 10% 5-year bond is issued on May 1, 2021. Interest is payable annually every
April 30.

Required: Prepare the journal entries to record the issuance of bond on May 1, 2021, accrual of
interest and amortization of premium/discount on December 31, 2021 and payment of interest on
April 30, 2022 under the following assumptions:
1. The market rate on May 1, 2021 is 5%.
2. The market rate on May 1, 2021 is 12%.

1) Nominal > Market rate = Premium

Derecognition of Bonds Payable

Bonds payable may be settled through:

● Retirement prior to maturity date
 ● Payment on maturity date

● Converting into equity securities (for convertible bonds)

Early Retirement of Bonds

Procedures:
1. Accrue the interest and update the amortization as of date of retirement.
2. Compute the amount to be paid, including the accrued interest from last interest date.
3. Derecognize the bond liability and related accounts.

Retirement Price > Carrying Value (excluding the accrued interest) = Loss on Retirement

Retirement Price < Carrying Value (excluding the accrued interest) = Gain on Retirement

Illustration: Using the previous problem and assume that P4,000,000 of the bonds were retired on
June 30, 2022 at 101 plus accrued interest.

Required: Prepare the journal entry to record the retirement of bonds on June 30, 2022 under the two
assumptions above.

EXERCISES:
A.

1) Under the effective interest amortization, the periodic interest expense is equal to
A. The stated rate of interest multiplied by the face value of the bonds.
B. The market rate of interest multiplied by the face value of the bonds.
C. The stated rate multiplied by the beginning carrying amount of bonds payable.
D. The market rate multiplied by the beginning carrying amount of bonds payable.

2) Bearer bonds are

A. Bonds for which the owners’ names are not registered with the issuer.
B. Bonds that are unsecured.
C. Bonds that pay no interest unless the issuer is profitable.
D. High-risk and high-yield bonds issued by heavily indebted or weak entities.
.
3) Premium on bonds payable is a(n)
A. Valuation account
B. Contra account
C. Accumulation account
D. Adjunct account

4) The rate of interest that is used to discount the future cash payments on a debit to the cash equivalent is least likely to
be described by which of the following terms
A. Effective interest rate
 B. Yield interest rate
C. Stated interest rate
D. Prevailing interest rate

5) If a bond was sold at 105, then the stated rate of interest was:
A. Equal to market rate
B. Not related to market rate
C. Higher than market rate
D. Lower than market rate

6) The bond interest expense for a period is more than interest paid when bonds are sold at
A. A premium
B. Par
C. A discount
D. A yield

Use the following information for the next two (2) questions:

Ava Company issued 10-year bonds payable with face amount of P4,000,000 on January 1, 2023. The interest is
payable annually on December 31 at the 6% stated interest rate. The bonds were issued to yield 9%. The present
value of 1 at 6% for 10 periods is 0.56 and the present value of an ordinary annuity of 1 at 6% for 10 periods is 7.36.
The present value of 1 at 9% for 10 periods is 0.42 and the present value of an ordinary annuity of 1 at 9% for 10
periods is 6.42.
7) What is the market price of the bonds on January 1, 2023?
A. 3,680,000
B. 3,991,200
C. 3,220,800
D. 4,000,000

8) What is the bond interest expense for 2023?

A. 246,000
B. 360,000
C. 193,248
D. 289,872

Use the following information for the next two (2) questions:

At the beginning of current year, Glocie issued ten-year bonds with a face amount of P5,000,000 and stated interest
rate of 8% payable annually at every year-end. The bonds were price to yield 10%
PV of 1 for 10 periods at 10% 0.3855

PV of an ordinary annuity of 1 for 10 periods at 10% 6.1450

10) What is the issue price of the bonds?

A. 5,000,000
B. 1,927,500
C. 5,614,500
D. 4,385,500
11) What is included in the adjusting entry at year-end in relation to the bonds payable?
A. Debit interest expense P400,000
B. Debit premium on bonds payable P38,550
C. Credit discount on bonds payable P38,550
D. Credit cash P438,550
12) On January 1, 2009, Sweet Company purchased 5-year bonds with face value of P8,000,000 and stated interest of
10% per year payable semi-annually January 1 and July 1. The bonds acquired to yield 8%. What is the purchase
price of the bonds?
A. 7,382,400
B. 8,617,600
C. 8,648,800
D. 7,351,200

13) On January 1, 2020, AAA Co. issued 10%, P12,000,000 bonds at 105. Transaction costs incurred amounted to
P177,096. Principal on the bonds mature in three equal annual installments. Interest payments are also made
annually at each year-end. How much is the carrying amount of the bonds on December 31, 2020?
A. 8,844,635
B. 8,793,368
C. 8,312,341
D. 8,216,735

Use the following information for the next two (2) questions:

On January 1, 2019 Chespin Co. issued 3 year bonds with a face value of P1,200,000 and stated interest of 8% per
year payable annually on December 31. The bonds were acquired to yield 10%. The bonds were appropriately
classified as financial liability at amortized cost. (PVF 4 Decimal)
14) How much is the issue price of the bonds on January 1, 2019?
A. 1,140,302 B. 1,051,730 C. 1,055,730 D. 1,200,340

15) How much is the interest expense for 2019?

A. 117,817 B. 114,104 C. 114,030 D. 96,000