BATANGAS STATE UNIVERSITY

The National Engineering University

Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

INTERMEDIATE ACCOUNTING II
BS Management Accounting
1st Semester, AY 2024 - 2025
Reference: Conrado Valix, [Link]

BONDS PAYABLE
A 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 the principal sum is paid.
In simple language, a bond is a contract of debt whereby one party called the issuer borrows funds from another
party called the investor.

A bond is evidenced by a certificate and the contractual agreement between the issuer and, investor is contained
in a document known as bond indenture.

Term and Serial Bonds

Term bonds are bonds with a single date with maturity. Term bonds may require the issuing entity to establish a
sinking fund to provide adequate money to retire the bond issue at one time.

Serial bonds are bonds with a series of maturity dates instead of a single one. In other words, serial bonds allow
the issuing entity to retire the bonds by installments.

Secured and Unsecured bonds

Mortgage bonds are bonds secured by a mortgage on real properties.

Collateral trust bonds are bonds secured by shares and bonds of other corporation.

Debenture bonds are unsecured or bonds without collateral security.

Registered and bearer bonds

Registered bonds require the registration of the name of the bondholders on the books of the corporation.

If the bondholder sells a bond the old bond certificate is surrendered to the entity and a new bond certificate is
issued to the buyer. Interest is periodically paid by the issuing entity to bondholders of record.

Coupon or bearer bonds are unregistered bonds in the sense that the name of the bondholder is not recorded on
the entity books. The issuing entity does not maintain a record of who owns the bonds at any point in time. Thus,
interest on coupon bonds is paid to the person submitting a detachable interest coupon.

Other types of bonds

Convertible bonds are bonds that can be exchanged for shares of the issuing entity.

Callable bonds are bonds which may be called in for redemption prior to the maturity date.

Guaranteed bonds are bonds issued whereby another party promises to make payment if the borrower fails to do
so.

Junk bonds are high-risk, high-yield bonds issued by entities that are heavily indebted or otherwise in weak
financial condition.

Zero-coupon bonds are bonds that pay no interest but the bonds offer a return in the form of a "deep discount" or
huge discount from the face amount.

ACC 309 Module 5 – Bonds Payable

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 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

Features of Bond Issue

a. A bond indenture or deed of trust is the document which shows in detail the terms of the loan and the
rights and duties of the borrower and other parties to the contract.
b. Bond certificates are used. Each bond certificate represents a portion of the total loan. The usual
minimum denomination in business practice is P1,000 although smaller denominations may be issued
occasionally.
c. If property is pledged as security for the loan, a trustee is named to hold title to the property serving as
security. The trustee acts as the representative of the bondholders and is usually a bank or trust entity.
d. A bank or trust entity is usually appointed as registrar or disbursing agent. The borrower deposits
interest and principal payments with the disbursing agent, who then distributes the funds to the
bondholders.

Contents of Bond Indenture

The bond indenture is the contract between the bondholders and the borrower or issuing entity. Normally, the
bond indenture contains the following items:
a. Characteristics of the bonds
b. Maturity date and provision for repayment
c. Period of grace allowed to issuing entity
d. Establishment of a sinking fund and the periodic deposit therein.
e. Deposit to cover interest payments
f. Provisions affecting mortgaged property, such as taxes, insurance coverage, collection of interest or
dividends on collaterals
g. Access to corporate books and records of trustee
h. Certification of bonds by trustee
i. Required debt to equity ratio
j. Minimum working capital to be maintained, if any.

Initial measurement of bonds payable

PFRS 9, paragraph5.1.1, provides that bonds payable not [Link] at fair [Link] through profit or loss shall be
measured initially at fair value minus transaction costs that [Link] directly attributable to the issue of the bonds
payable.

The fair value of the bonds payable is equal to the present value of the future cash payments to settle the bond
liability.

Bond issue costs shall be deducted from the fair value or issue price of the bonds payable in measuring initially the
bonds payable.

However, if the bonds are designated and accounted for at fair value through profit or loss, the bond issue costs
are treated as expense immediately.

Actually, the fair value of the bonds payable is the same as the issue price or net proceeds from the issue of the
bonds, excluding accrued interest.

Subsequent measurement of bonds payable

PFRS 9, paragraph 5.3.1, provides that after initial recognition, bonds payable shall be measured either:
a. At amortized cost, using the effective interest method
b. At fair value through profit or loss

Amortized cost of Bonds Payable

The amortized cost of bonds payable is the amount at which the bond liability is measured initially minus
principal repayment plus or minus the cumulative amortization using the effective interest method, of any
difference between the face amount and present value of the bonds payable.

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 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

Actually, the difference between the face amount and present value is either discount or premium on bonds
payable.

Accounting for issuance of bonds payable

There are two approaches in accounting for the authorization and issuance of bonds, namely:
a. Memorandum Approach
b. Journal entry approach

Presentation of bond discount and premium

Discount on bond payable and premium on bond payable are reported as adjustments to the bond liability
account.

The discount on bond payable is a deduction from the bond payable and the premium on bond payable is an
addition to the bond payable.

This treatment is on the theory that the discount represents an amount that the issuer cannot borrow because of
interest differences, and the premium represents an amount in excess of face amount that the issuer is able to
borrow.

The discount on bonds payable and the premium on bonds payable shall not be considered separate from the
bonds payable account. Both accounts shall be treated consistently as valuation accounts of the bond liability.

Bond issue costs

Bond issue costs are transaction costs directly attributable to the issue of bonds payable. Such costs include
printing and engraving cost, legal and accounting fee, registration fee with regulatory authorities, commission
paid to agents and underwriters and other similar charges.

Under IFRS, bond issue costs shall be deducted from the fair value or issue price of bonds payable in measuring
initially the bonds payable.

Under the effective interest method of amortization, the bond issue cost must be "lumped" with the discount on
bonds payable and "netted" against the premium on bonds payable.

However, if the bonds are measured at fair value through profit or loss, the bond issue costs are expensed
immediately.

Recording Interest on Bonds Payable

Accounting for interest expense on bonds payable requires recognition of two items, namely:
a. Payment of interest during the year
b. Accrual of interest at the end of the year

Issuance of bonds payable on interest date

Issuance of bonds between interest dates

Bond retirement on maturity date

To make a bond issue more attractive, an entity may agree in the bond indenture to establish a sinking fund
exclusively for use in retiring the bonds at maturity.

The periodic cash deposits plus the interest earned on sinking fund securities should cause the fund to
approximately equal the amount of bond issue on maturity date.

When the bonds approach maturity date, the trustee sells the securities and uses the sinking fund cash to pay the
bondholders. Any excess cash is returned to the issuing entity.

Bond retirement prior to maturity date

When bonds are reacquired prior to maturity date, the bonds may be canceled and permanently retired, or held to
the treasury for future reissue when the need for fund arises.

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 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

If the reacquired bonds are canceled and permanently retired, the following procedures are followed.
a. The Premium or discount o bonds payable should be amortized up to the date of retirement.
b. The balance of the premium or discount on bonds payable should be determined. This balance is
important because the amount related to the bonds retired is canceled.
c. The accrued interest to date of retirement should be determined.
d. The total cash payment should be computed. This is equal to the retirement price plus the accrued
interest. The retirement price is a certain percent ·of the face amount of the bonds payable.
e. The carrying amount of the bonds payable retired is determined. The face amount of the bonds payable
plus the unamortized premium or minus the unamortized discount on bonds payable gives the carrying
amount of the bonds payable.

The gain or loss on the retirement of the bonds payable is computed. The gain or loss is the difference
between the retirement price and the carrying amount of the bonds payable.

If the retirement price is more than the carrying amount of the bonds payable, the difference is a loss. If
the retirement price is less than the carrying amount of the bonds payable, the difference is a gain.

f. The retirement of the bonds payable is then recorded by canceling the bonds payable together with the
unamortized premium or discount on bonds payable. Any accrued interest is debited to interest expense.

Treasury bonds
Treasury bonds are an entity's own bonds originally issued and reacquired but not canceled. The acquisition of
treasury bonds calls for the same accounting procedures accorded to a formal retirement of bonds prior to the
maturity date.

In other words, the treasury bonds should be debited at face amount and any related unamortized premium or
discount on bonds payable should be canceled. Any accrued interest paid is charged to interest expense.

The difference between the acquisition cost and the carrying amount of the treasury bonds is treated as gain or
loss on the acquisition of treasury bonds.

Bond refunding
Bond refunding is the floating of new bonds payable the proceeds from which are used in paying the original
bonds. Simply stated, bond refunding is a premature retirement of the old bonds payable by means of issuing new
1

bonds payable.

Bond refunding shall be accounted for as an extinguishment of the old bonds payable.

The difference between the carrying amount of the old bonds payable and the consideration paid shall be
accounted for as gain or 'loss or extinguishment.

Amortization of bond discount or premium

There are three approaches in amortizing premium or discount on bonds payable, namely:
a. Straight line
The straight line method provides for an equal amortization of premium or discount on bonds payable.
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. The life of the bonds is that period commencing on the date
of sale of the bonds up to the maturity date.

b. Bond outstanding method

The bond outstanding method is applicable to serial bonds whether issued at discount or premium. Serial
bonds are those with a series of maturity dates.

c. Effective interest method or simply "interest method" or scientific method

IFRS 9 requires the use of the effective interest method in amortizing bond discount, bond premium and
bond issue cost.

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 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

Fair value option of measuring bonds payable

PFRS 9, paragraph 4.2.2, provides that at initial recognition of bonds payable may be irrevocably designated as at
fair value through profit or Loss.

Under the fair value option, the bonds payable shall be measured initially at fair value and re measured at every
year end with any changes in fair value generally recognized in profit or loss.

Then is no more amortization of bond discount and bond premium. Any transaction cost or bond issue cost should
be expensed immediately. As a matter of fact, interest expense is recognized using the nominal or stated rate.

Change in fair value recognized in OCI

The change in fair value attributable to the credit risk of the liability is recognized in other comprehensive income.

Credit risk is the risk that the issuer of the liability would cause a financial loss to the other party by failing to
discharge the obligation. Credit risk does not included market risk such as interest risk, currency risk and price
risk. The remaining amount of the change in fair value is recognized in profit or loss.

EXERCISES
1. Hancock Company reported the following noncurrent liabilities on December 31, 2024.
Unsecured
10% registered bond, 250,000 maturing annually beginning 2025 2,750,000
11% convertible bonds, callable beginning 2025, due 2026 1,250,000

Secured
12% guaranty security bonds, due 2026 2,500,000
10% commodity backed bond, P500,000 maturing annually
beginning in 2025 2,000,000

What total amount of term bonds should be reported?

What total amount of serial bonds should be reported?

What total amount of debenture bonds should be reported?

2. On October 1, 2024, Shane Company issued 5,000 12% bonds payable with face amount of P1,000 per
bond at 110. The bonds which mature on January 1, 2029, pay interest semi annually on January 1 and
July 1. The entity paid bond issue cost of P200,000

What amount should be reported as cash received from the issuance of the bonds payable?

ACC 309 Module 5 – Bonds Payable

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 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

3. On June 30, 2024, King Company had outstanding 9%, bond payable with face amount of P5,000,000 and
maturing on June 30, 2029. Interest is payable semiannually every June 30 and December 31.

On June 30, 2024 after amortization was recorded for the period, the unamortized premium on bonds
payable was P300,000. On that date, the entity acquired all outstanding bonds payable on the open
market at 98 and retired them.

On June 30, 2024, what amount should be recognized as gain on redemption of bonds payable?

4. On January 1, 2024, Carmina Company received P5,385,000 for a P5,000,000 face amount 12% bonds
payable, a price that yields 10%. The bonds pay interest semiannually on June 30 and December 31.

The entity elected the fair value option. On December 31, 2024, the fair value of the bonds payable is
determined to be P5,125,000 based on market and interest factors.

What amount should be reported as interest expense for 2022?

What amount should be recognized as gain or loss from change in fair value in 2024?

What is the carrying amount of the bonds payable on December 31, 2024?

MULTIPLE CHOICES
1. The proceeds from the issue of the bonds payable
a. Will always be equal to the face amount.
b. Will always be less than the face amount.
c. Will always be more than the face amount.
d. May be equal, more or less than the face amount depending on market interest rate.

2. The issuer of bonds payable sold at face amount with interest payable February 1 and August 1 should
report
a. Liability for accrued interest
b. An addition to bonds payable
c. Increase in deferred charge
d. Contingent liability

3. A bond payable issued on June 1 has interest payment dates of April 1 and October 1. Bond interest
expense for the-current year ended December 31 is for a period of
a. Three months
b. Four months
c. C. Six months
. d. Seven months

4. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1,
the amount of cash received by the issuer will be
a. Decreased by accrued interest from June 1 to November 1
b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from June 1 to November 1
d. Increased by accrued interest from May 1 to June 1

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