Bonds payable (1)

LONG TERM LIABILITIES

1. 1

LONG TERM LIABILITIES
BONDS PAYABLE – unconditional promise, made under seal, to pay a specified sum of money at a
determinable future date, and to make periodic ineterest payment at a stated rate until the principal
sum is paid; contract of debt
- Evidenced by:
 Bond Indenture – legal contract between the issuer and investor that specifies the
scope and responsibilities of the brrower and other details.
 Bond certificate – legal document describing the indebtedness of a borrower and
the terms of payment.
TYPES OF BONDS
- TERM BONDS
o Bonds with a single date of maturity
- SERIAL BONDS
o Bonds with a series of maturity dates; installments
- MORTGAGE BONDS
o Secured by a mortgage on real properties
- COLLATERAL TRUST BONDS
o Secured by stocks and bonds of other corporation
- DEBENTURE BONDS
o Bonds without collateral security
- REGISTERED BONDS
o Require the registration of the name of the bondholder on the books of the corporation
- BEARER BONDS
o Bondholders are not recorded on the books
- CONVERTIBLE BONDS
o Bonds that can be exchanged for shares of the issuing entity
- CALLABLE BONDS
o Bonds which may be called in for redemption prior to the maturity date
- GUARANTEED BONDS
o Another party promises to make payment if the borrower fails to do so
- JUNK BONDS
o High-risk, high-yield bonds issued by entities that are heavily indebted or otherwise in
weak financial condition
Initial measurement: FAIR VALUE
Subsequent measurement:
- AMORTIZED COST (effective interest method)
- FAIR VALUE THROUGH PRFOFIT OR LOSS
ISSUANCE OF BONDS
JOURNAL ENTRY MEMORANDUM


Unissued Bonds Payable

No entry/memo upon issuance
Authorized Bonds Payable



Cash

Cash subsequent sale
Unissued Bonds Payable

Bonds Payable

2. 2

below par/discount above par/premium at PAR
ER>NR ER<NR ER=NR

ISSUANCE OF BONDS AT A PREMIUM
- Sales price is more than the face value of the bonds
- Effective rate < Nominal Rate
Illustration:
A entity issued bonds with a face amount of 2M at a quoted price of 103.
Cash (2M x 1.03) 2,060,000
Bonds Payable 2,000,000
Premium on Bonds Payable 60,000
ISSUANCE OF BONDS AT A DISCOUNT
- Sales price is less than the face value of bonds
- Effective rate > Nominal Rate
Illustration:
An entity issued bonds with a face amount of 2M at a quoted price of 98.
Cash (2M x 0.95) 1,900,000
Discount on Bonds Payable 100,000
Bonds Payable 2,000,000
INTEREST ON BONDS
On May 31, 2018, an entity issiued bonds with a face amount of 1M and 10% ineterest payable
semiannually on May 1 and October 1.
- Payment of interest during the year
10/31/18 Interest Expense (1M x 0.10 x ½) 50,000
Cash 50,000
- Accrual of interest
12/31/18 Interest Expense (1M x 0.10 x 3/12) 25,000
Accrued Interest Payable 25,000
BOND ISSUE COST
- Tansaction costs that ae directly attributable to the issue of bonds payable
o Printing and engraving
o Legal and accounting fee
o Registration fee with regulatory auhtorities
o Commissions paid to agents and underwriters
- Shall be deducted from the fair value or issue price
- Expensed if bonds are measured at fair value through profit or loss
ISSUANCE OF BONDS ON INTEREST DATES
On August 1, 2018, the entity issued 1M 4-yr bonds with a face amount of 1M at 102 that pays
10% semiannually on August 1 and November 1.

3. 3

8/1/18 Cash (1M x 1.02) 1,020,000
Premium on Bonds Payable 20,000
Bonds Payable 1,000,000
11/01/18 Interest Expense (1M x 0.10 x ½) 50,000
Cash 50,000
12/31/18 Interest Expense (1M x 0.10 x 2/12) 16,667
Accrued Interest Payable 16,667
Premium on Bonds Payable 2,083
Interest Expense 2,083
[(20,000/4) x 5/12]
ISSUANCE OF BONDS BETWEEN INTEREST DATES
On September 1, 2018, the entity issued 1M 4-yr bonds with a face amount of 1M at 102 that
pays 10% semiannually on August 1 and November 1.
Issue Price 1,020,000
Accrued Interest (1M x 0.10 x 1/12) 8,333
Total cash received 1,028,333

9/1/18 Cash 1,028,333
Premium on Bonds Payable 20,000
Bonds Payable 1,000,000
Interest Expense 8,333
11/01/18 Interest Expense (1M x 0.10 x ½) 50,000
Cash 50,000
12/31/18 Interest Expense (1M x 0.10 x 2/12) 16,667
Accrued Interest Payable 16,667
Premium on Bonds Payable 1,702
Interest Expense 1,702
(20,000/47months x 4)

Original life of bonds (4yrs x 12) 48months
Less: Expired life 1month
Remaining life 47months
BOND RETIREMENT
On August 1, 2018, the entity issued 1M 4-yr bonds with a face amount of 1M at 98 that pays
10% semiannually on August 1 and November 1.

4. 4

Retirement on Maturity Date
8/1/22 Bonds Payable 1,000,000
Interest Expense 50,000
Discount on Bonds Payable 70,000
Cash 980,000

Retirement on February 1, 2020 at 92
Amortization of bond discount:
70,000/4 = 17, 500 annual amortization
Interest Expense (17,500/2) 8,750
Discount on Bonds Payable 8,750

8/1/18 70,000
8/1/18 – 2/1/20 [(18months/48) * 70,000] (26,250 )
Balance, 2/1/20 43,750

Cash payment:
Retirement Price 920,000
Accrued interest
(1M x 10% x 3/12 = 25,000) 25,000
Total Cash payment 945,000
Carrying Amount:
Bonds Payable 1,000,000
Discount on Bonds Payable ( 43,750)
Carrying Amount, 2/1/20 956,250
2/1/20 Bonds Payable 1,000,000
Interest Expense 25,000
Loss on Early retirement of bonds
Cash 945,000
Discount on Bonds Payable 43,750
Gain on early retirement of bonds 36,250
TREASURY BONDS
- Entity’s own bonds originally issued and reacquired but not cancelled
Illustration:
A 1M bond was originally issued at 105, subsequently,the entity reacquired 500,000 face
amount at 102. At reacquisition, unamortized premium balance is 45,000 and accrued interest is 4,000.

5. 5

Acquisition:
Face amount 500,000
Premium (500,000/1M * 45,000) 22,500
Carrying Amount 522,500
Reacquisition price (500,000 * 102) (510,000)
Gain on reacquisition 12,500

Reacquisition price 510,000
Accrued Interest 45,000
Cash Payment 555,000

Entry:
Treasury Bonds 500,000
Premium on Bonds Payable 22,500
Interest Expense 45,000
Cash 555,000
Gain on acquisition of TB 12,500
Subsequent sale at 102:
Cash 510,000
Treasury Bonds 500,000
Premium on Bonds Payable 10,000
Subsequent sale at 98:
Cash 490,000
Discount on Bonds Payable 10,000
Treasury Bonds 500,000
BOND REFUNDING/REFINANCING
1. Issuance of new 4-yr 10% with 1M face amount at 1,100,000
2. Refunding of old 10% bonds with remaining life of 2 years at 104
Bonds Payable-old 1,000,000
Discount on Bonds Payable 10, 000
Retirement price (1M * 1.04) 1,040,000
Entry:
1. Cash 1,100,000
Bonds Payable 1,000,000
Premium on Bonds Payable 100,000

6. 6

2. Bonds Payable 1,000,000
Loss on Extinguishment of bonds 50,000
Cash 1,040,000
Discount on Bonds Payable 10,000
FAIR VALUE OPTION
- No amortization
- Any transaction/bond issue cost are expensed outright
- Interest Expense is recognized using the stated/nominal rate
Illustration:
On January 1, 2018, an entity issued a 12% bond amounting to 1M at 103 to yield 10%. Interest
is payable annually on December 31. The entity paid bond issue cost of 50,000. On December 31, 2018,
the fair value of the bonds is decreased by 80,000.
ENTRY:
1/1/18 Cash 1,030,000
Bonds Payable 1,030,000
Transaction Cost 50,000
Cash 50,000
12/31/18 Interest Expense 120,000
Cash 120,000
Bonds Payable 80,000
Gain from change in FV 80,000

Suppose that on December 31, 2018, the fair value of the bonds is increased by 100,000; 80,000 is
attributable to increase in the market interest rate, the remaining is attributable to credit risk.
12/31/18 Loss on credit risk-OCI 20,000
Loss from change in FV 80,000
Bonds Payable 100,000

Note: Credit risk does not include market risks: interest, currency and price risk.

7. 7

AMORTIZATION OF BOND DISCOUNT OR PREMIUM
1. Straight Line
Amortization = Bond Discount or Premium/Life of the bonds
2. Bond Outstanding Method (serial bonds)
Illustration 1:
On January 1, 2018, an entity issues a 10% bond with a face amount of 1M at 102 that
pays 200,000 yearly for five years.
Table of amortization
Premium Amortization Fraction Bond Outstanding Year
6,666.00 1000/3000 1,000,000.00 2018
5,333.00 800/3000 800,000.00 2019
4,000.00 600/3000 600,000.00 2020
2,666.00 400/3000 400,000.00 2021
1,333.00 200/3000 200,000.00 2022
20,000.00

3,000,000.00

8. 8

NOTES PAYABLE – a liability in writing made by one person to another, signed by the maker,
promising to pay a specific amount of money at a future date or on demand
Initial Measurement: FAIR VALUE / PRESENT VALUE
Subsequent measurement:
- AMORTIZED COST (effective interest method)
- FAIR VALUE THROUGH PRFOFIT OR LOSS
INTEREST BEARING - CASH
 Present Value = Cash Proceeds
Illustration:
A 1M note is discounted at 10% for one year on October 1, 2018.
Note Payable 1,000,000
Less: Discount (10% x 1M) 100,000
Net Proceeds 900,000
Entry: October 1, 2018
Cash 900,000
Discount on Note Payable 100,000
Note Payable 1,000,000
Amortization: December 31, 2018 (straight line method)
Interest Expense (100,000 * 3/12) 25,000
Discount on Note Payable 25,000
INTEREST BEARING – PROPERTY
 Present Value = Purchase Price
Illustration:
An entity acquired a machinery for 1M payable in 4 annual equal installments on December 31.
Interest is 10% on the unpaid.
Entry: Jan 1, 2018
Machinery 1,000,000
Note Payable 1,000,000
First Payment: December 31, 2018
Interest Expense (1M * 10%) 100,000
Note Payable (1M/4) 250,000
Cash 350,000
Second Payment: December 31, 2019
Interest Expense (10% * 750, 000) 75,000
Note Payable 250,000
Cash 325,000

9. 9

...
NONINTEREST BEARING – PROPERTY
 Present Value = Cash price
 Imputed Interest = Cash Price – Face Value
Illustration:
An entity acquired a machinery with a cash price of 1M for 1.2M; 200,000 down and the balance
in 5 equal annual installments.
ENTRY: Jan 1, 2018
Machinery 1,000,000
Discount on Note Payable (1.2M-1M) 200,000
Cash 200,000
Note Payable 1,000,000
FIRST PAYMENT: December 31, 2018
Note Payable (1.2M – 200,000)/5 200,000
Cash 200,000
Interest Expense 50,000
Discount on Note Payable 50,000
YEAR NOTE PAYABLE FRACTION DISCOUNT AMORTIZATION
2018 1,000,000.00 0.33 150,000.00 50,000.00
2019 800,000.00 0.27 150,000.00 40,000.00
2020 600,000.00 0.20 150,000.00 30,000.00
2021 400,000.00 0.13 150,000.00 20,000.00
2022 200,000.00 0.07 150,000.00 10,000.00
3,000,000.00 150,000.00

NONINTEREST BEARING NOTE - PROPERTY (NO CASH PRICE) ; INSTALLMENT
 NO AGREED INTEREST, NO CASH PRICE
 COST OF PROPERTY = PRESENT VALUE
Illustration:
An entity acquired a machinery for 1M payable in 5 equal annual payments. The prevailing
market rate of interest is 10%.
PV of 5 P200,000 = 3.7908
200,000 * 3.7908 = 758,160
ENTRY: Jan 1, 2018
Machinery 758,160
Discount on Note Payable (1M – 758,160) 241,840
Note Payable 1,000,000
FIRST PAYMENT:
Note Payable 200,000
Cash 200,000

10. 10


10% PAYMENT - INT PV-PRINCIPAL
YEAR PAYMENT INTEREST PRINCIPAL PRESENT VALUE
1/1/2018 758,160
12/31/2018 200,000.00 75,816 124,184 633,976
12/31/2019 200,000.00 63,398 136,602 497,374
12/31/2020 200,000.00 49,737 150,263 347,111
12/31/2021 200,000.00 34,711 165,289 181,822
12/31/2022 200,000.00 18,182 181,818 -

NONINTEREST BEARING NOTE - PROPERTY (NO CASH PRICE) ; LUMP SUM
Illustration:
An entity acquired equipment for 1M. The entity paid 100,000 down and the balance is due
after three years. The prevailing interest rate is 10%. The PV of 1 for 3 periods is .7513.
Downpayment 100,000
Present Value (900,000*7513) (676,170)
Cost of Equipment 776,170

Face Value 900,000
Present Value (676,170)
Imputed Interest 223,830

ENTRY: January 1, 2018
Equipment 776,170
Discount on Note Payable 223, 830
Cash 100,000
Note Payable 900,000
ENTRY: December 31, 2018