BONDS PAYABLE
Bond – 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
A bond is a contract of debt whereby one party called the issuer borrows funds from another party called the investor.
ISSUANCE OF BONDS
Bonds can be issued in several ways, for example, through underwriting, auction, or direct placement with investors.
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.”
Bond indenture is the contractual agreement between the issuer and the bondholders. It contains restrictive covenants
intended to prevent the issuer from taking actions contrary to the interests of the bondholders.
▪ Rights and duties of bondholders and issuers
▪ Restrictions and requirements on the issuer
▪ Interest rate, payment dates, maturity dates
Bond certificate is issued to the bondholder representing the amount of bonds he has purchased. Bonds are normally issued
in denominations, such as P1,000 and P10,000.
Measurement of Bonds Payable
Initial Measurement Subsequent Measurement
Not designated at FVPL Fair value less transaction cost At amortized cost using EIM
Under fair value option FVPL Fair value At fair value through profit or loss
Illustration: Determine the Issue Price/Present Value
Case 1: Case 2:
Face amount of the bonds P3,000,000 Face amount of the bonds P3,000,000
Date issue of bonds January 1, 2020 Date issue of bonds January 1, 2020
Nominal rate 8% Nominal rate 6%
Effective rate 6% Effective rate 8%
Semiannual interest June 30 and December 31 Semiannual interest June 30 and December 31
Date of maturity January 1, 2022 Date of maturity January 1, 2025
Case 3:
Face amount P6,000,000
Annual installment every December 31 P2,000,000
Date of issue January 1, 2020
Nominal rate payable annually every December 31 12%
Effective interest rate 14%
Case 4:
Face amount P6,000,000
Semi-annual installment every June 30 and December 31 P1,000,000
Date of issue January 1, 2020
Nominal rate payable semiannually every Jun 30 & Dec 31 12%
Effective interest rate 14%
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.
BONDS PAYABLE
Carrying amount vs. Effective Interest Rate vs. Effect of Amortization on
Face Amount Nominal Interest Rate Interest Expense
Discount CA < FA EIR > NIR Int Exp > Int Paid
Premium CA > FA EIR < NIR Int Exp < Int Paid
Illustration 1: Bonds issued at a discount
On January 1, 20X1, ABC Co. issued 1,000, P1,000, 10% 3-year bonds for P951,963. Principal is due at maturity but interest
is due annually every year-end. The effective interest rate is 12%.
Requirement:
1. Compute the carrying amount of bonds payable on December 31, 20X1, 20X2, 20X3.
2. Compute the interest expense for 20X1, 20X2, 20X3.
Illustration 2: Bonds issued at a premium
On January 1, 20X1, ABC Co. issued 1,000, P1,000, 12%, 3-year bonds for P1,049,737. Principal is due at maturity but
interest is due annually every year end. The effective interest rate is 10%.
Requirement:
1. Compute the carrying amount of bonds payable on December 31, 20X1, 20X2, 20X3.
2. Compute the interest expense for 20X1, 20X2, 20X3.
Illustration 3: Bonds issued at a discount – with transaction costs
On January 1, 20X1, ABC Co. issued 1,000, P1,000, 10% 3-year bonds for P951,963. Principal is due on Dec. 31, 20X3
but interest is due annually every year end. In addition, ABC incurred bond issue costs of P44,829. The effective interest
rate is 12% before adjustment for bond issue costs and 14% after adjustment for bond issue costs.
Requirement:
1. Compute the carrying amount of bonds payable on December 31, 20X1, 20X2, 20X3.
2. Compute the interest expense for 20X1, 20X2, 20X3.
ISSUANCE OF BONDS BETWEEN INTEREST PAYMENT DATES
When bonds are issued between interest payment dates, the accrued interest prior to the issuance date is excluded in the
initial measurement of the bonds and credited to interest payable or interest expense. The interest expense recognized
represents only the interest incurred after the issuance date, i.e., the post-issuance interest.
Illustration:
On April 1, 20X1, ABC Co. issued 12%, P1,000,000 bonds dated January 1, 20X1.
Case 1: The bonds were issued at 97 including accrued interest.
Case 2: The bonds were issued at 97 excluding accrued interest.
Requirement: Compute for the initial carrying amount of the bonds.
RETIREMENT OF BONDS PRIOR TO MATURITY
When bonds are retired, any difference between the retirement price and the carrying amount (updated for any discount or
premium amortization up to the date of retirement) is recognized as gain or loss in profit or loss.
Illustration: Retirement – between interest payment dates
On January 1, 20X1, ABC Co. issued 5-year, 12%, P1,000,000 bonds for P1,075,816. Principal is due at maturity but interest
is due annually. The effective interest rate is 10%.
On July 1, 20X3, ABC retired the bonds at 102, including payment for accrued interest.
Requirement: Compute for the gain or loss on retirement.
BONDS PAYABLE
PROBLEMS
Problem 1: Biliran Corporation issued bonds with face value of P6,000,000 on January 1, 2021. The nominal rate of 6% is
payable annually on December 31. The bonds are issued with an 8% effective yield. The bonds mature every December 31
each year at the rate of P2,000,000 for three years. (Round off present value factors to four decimal places.)
1. Interest expense in 2022
2. Current portion of bonds payable on December 31, 2021
3. Noncurrent portion of bonds payable on December 31, 2021
Problem 2: On January 1, 2020, Davao Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds dated January
1 at an effective annual interest rate (yield) of 9%. Interest is payable each year December 31. Davao uses the effective
interest method of amortization. On December 31, 2021, the 2,000 bonds were extinguished early through acquisition in
the open market by Davao for P1,980,000 plus accrued interest. (Round off present value factors to four decimal places.)
1. The issue price of the 2,000 5-year, P1,000 face value bonds on January 1, 2020 is
2. The carrying amount of the 2,000 5-year, P1,000 face value bonds at December 31, 2020 is
3. The gain or loss on early retirement of bonds on December 31, 2021 is
Problem 3: On January 1, 2020, Perez Corporation issued 5,000 of its 5-year, P1,000 face value, 11% bonds dated January
1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Perez uses the effective interest
method of amortization. On December 31, 2021, the 3,000 bonds were extinguished early through acquisition in the open
market by Perez for P2,970,000 plus accrued interest. (Round off present value factors to four decimal places.)
1. Issue price of the bonds on January 1, 2020
2. Carrying amount of the bonds on December 31, 2020
3. Gain or loss on early retirement of bonds on December 31, 2021
Problem 4: On January 1, 2023, an entity issued 5-year, 5,000 bonds with face amount of P1,000 per bond for P5,380,000
to yield 10%. Interest of 12% is payable annually every December 31. On June 30, 2024, the entity retired 2,000 bonds at
96 plus accrued interest. The entity used the effective interest method.
1. The gain or loss on early retirement of bonds on June 30, 2024 should be recorded at
2. The carrying amount of the remaining bonds payable should be reported at
Problem 5: On January 1, 2023, Purl Company purchased as a long-term investment P5,000,000 face amount of Shaw
Company’s 8% binds for P4,564,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1,
2028 and pay interest annually on December 31. The interest method of amortization is used.
1. The interest income for 2024 should be reported at
2. The carrying amount of the bond investment on December 31, 2024 is