Accounting for the Issuance of Bonds:

Assume the company is authorized on January 1, 2012 to issue P5M, 10 year face value bonds, interest payable January 1 and July 1, consisting of 5K units, P1000 face value each. Straight line method: Memo Entry:

Journal entry: DR CR 1. Assume that the bonds are sold at face value to the underwriters.

Memo Entry method: DR CR Journal Entry: DR CR

2. 1/1/10

Assume that the bonds are sold at a premium at 105.

1-Jul

31-Dec

1/1/11

1/20/20

3. 1/10/10

Assume that the bonds are sold at a discount at 97.

1-Jul

31-Dec

1/1/11

1/20/20

4.

Assume that the bonds are sold at a discount at 97 and with the bond issue cost of

P100, 000. 1/10/10

1-Jul

31-Dec

1/1/11

1/20/20

5.

Assume that the bonds are sold between interest dates where bonds are sold at

P5,228,000 plus accrued interest on April 1, 2010. 4/10/10

1/10/10

1-Jul

31-Dec

1/1/11

1/20/20

7. Assume bonds mature prior to maturity on Jan. 1, 2015 at 97% Step 1. Amortization of the bond premium up to the date of retirement. 1/31/2014

Step 2. Balance of the premium is computed.

Step 3. Compute for the accrued interest up to date.

Step 4. Compute for the total cash payment. Retirement price plus the accrued interest.

Step 5. Compute for the book value of the bonds.

Step 6. Gain or loss on early retirement.

Step 7. Entry to record early retirement of Jan. 1.2015.

8. Assume only 1M are retired instead.

Retirement price Accrued interest Total

Face value Prem. Book value

Book value Retirement price Gain on early retirement

1/1/2015

07/1/2015

12/31/15

9. Assume that instead of retiring the bonds it was reacquired at 97 but not cancelled.

Reacquisition price Accrued expense Total Face value Prem. Book value

Book value Reacquisition price Gain

Treasury Bonds Interest expense Premium on bonds payable Cash Gain on acquisition of treasury bonds 7/1/15 Interst Expense Cash 12/31/15 Interest Expense

Accrued Interest Payable Premium on Bonds Payable Interest Expense 10. Assume that treasury bonds ate subsequently sold for P 1 200 000. Cash Treasury Bonds Premium on bonds payable 11. Assume that bonds are not subsequently sold upon maturity. Bonds Payable Treasury Bonds 12. Assume P5M, 10 year, 10% term bonds are sold at 105. Each bond is accompanied by one warrant that permits the bondholder to purchase 20 shares of capital, par 50, at 55 per share. The market value of the bonds ex-warrants at the time of issue it 98. Issue price of bonds with warrants Less: Market value of bonds ex-warrants Residual amount allocated to warrants Face value of bonds Less: Market value of bonds ex-warrants Discount on bonds payable

Cash Discount on bonds payable Bonds Payable Share warrants outstanding

13. Assume 60% were exercised Cash Share warrants outstanding Share capital Share premium

14. Assume remaining warrants expired Share warrants outstanding Share premium 15. Using the preceding illustration, the interest is payable annually at a nominal rate of 10%. When the bonds are issued the prevailing market rate of the interest of similar bonds without warrants is 12% per annum.

Present value of principal Present value of interest payments Total present value of the bonds Issue price of bonds with warrants Less: Present value of the bonds Residual amount allocated to warrants Face value of bonds

Less: Present value of the bonds Discount on bonds payable

Cash Discount on bonds payable Bonds Payable Share warrants outstanding 16. Using the preceding illustration in no. 14, the bonds has a conversion privilege instead that provide for an exchange of a P1,000 bond for 20 share capital, par 50. The market value of the bonds without the conversion privilege is 98. Issue price of bonds with warrants Less: Market value of bonds without conversion privilege Residual amount allocated to conversion privilege Face value of bonds Less: Market value of bonds without conversion privilege Discount on bonds payable

Cash Discount on bonds payable Bonds Payable Share warrants outstanding 17. Using the preceding illustration, the interest is payable semi-annually at a nominal rate of 10%. When the bonds are issued the prevailing market rate of the interest if similar bonds without conversion privilege is 12% per annum. Present value of principal Present value of interest payments Total present value of the bonds Issue price of bonds with warrants Less: Present value of the bonds Residual amount allocated to conversion privilege

Face value of bonds Less: Present value of the bonds Discount on bonds payable

Cash Discount on bonds payable Bonds Payable Share premium 18. Assume the balance sheet as of December 31, 2011 showed the following balances: Conversion ratio is 20 shares for every 1,000 bond. (Use no. 17 details)

Bonds payable 10% convertible Discount in bonds payable Share capital P40 par, 400,000 shares authorized and 250,000 shares issued

5,000,000.00 458,820.00 10,000,000.00

Bonds payable Discount on bonds payable Book of bonds payable Par value of share capital issued Share premium

Bonds payable Interest expense Share capital Share premium Discount on bonds payable Cash

19. Assume a company refunded the old 12% bonds, with remaining life of 4 years at 102 with the issuance of new 10-year, 10% bonds, with the face value of P1,500,000 for P1,600,000.

Bonds payable 1,000,000.00 Discount in bonds payable

30,000.00

1.

To record the issuance of the new bonds payable Cash Bonds Payable Premium on bonds payable

2.

To record the retirement of the old bonds payable

Bonds Payable Loss on early retirement Cash Discount on bonds payable

20. Effective amortization of discount Term bonds On January 1, 2010, a company issues a two-year 8% P1,000,000 face value bonds for P964,540,a price which will yield a 10% effective interest cost per year. Interest is payable semiannually on June 30 and December 31. DATE 1/1/2010 6/30/2010 12/31/2010 6/30/2011 12/31/2011 21. Effective amortization of premium Term Bonds On January 1, 2010, a company issues a three-year 12% P1,000,000 face value bonds for P1,049,740 ,a price which will yield a 10% effective interest cost per year. Interest is payable annually every December 31. DATE 1/1/2010 12/31/2010 12/31/2011 12/31/2012 22. Effective amortization of discount Serial Bonds Face value of the bonds 4,000,000.00 Nominal rate 12% Interest paid Interest Expense Discount Amortization Book Value Interest paid Interest Expense Discount Amortization Book Value

Effective rate Date of issue

10% 1-Jan0-10

The bonds mature on every December 31 of each year at the rate of P1,000,000.00 for 4 years. The Interest is payable annually. DATE 12/31/2010 12/31/2011 12/31/2012 12/31/2013 Total present value Face value Premium on bonds payable Interest paid Interest Expense Total payment PV factor Book Value

DATE 1/1/2010 12/31/2010 12/31/2011 12/31/2012 12/31/2013

Interest paid

Interest Expense

Premium amortization

Principal payment

Book Value

23. Effective Amortization bond discount and issue cost On January 1, 2010, the company issued three year bonds with face value of P10,000,000 and 9% stated rate. The bonds mature on January 1, 2013 and interest is payable on December 31. The bonds are issued at P9,751,2010 with an effective yield of 10%. Additionally, the company paid bond issue cost of P 239, 880.00 Face value Discount on bonds payable Issue price Bond issue cost Net proceeds

PV of principal PV of interest payments Total present value

1/1/2010

Cash Bond discount and issue cost Bonds payable

1/31/2010

Interest Expense Cash Interest Expense Bond discount and issue cost

DATE 1/1/2010 12/31/2010 12/31/2011

Interest paid

Interest Expense

Discount/issue cost Amortization

Book Value

12/31/2012 1/1/2013 Bonds payable Cash

24. On January 1, 2010, the company issued 5 year bonds with face value of P10,000,000 at 95. The Nominal rate is 10% and the interest us payable annually on December 31. The bonds mature on January 1,2015. Additionally the company paid bond issue cost of P200,000.00 Face Value Discount on bonds payable Issue price Bond issue cost Net proceeds PV of principal PVof interest payments Total PV of the bonds

1/1/2010

Cash Bond discount and issue cost Bonds payable

1/31/2010

Interest Expense Cash Interest Expense Bond discount and issue cost

DATE 1/1/2010 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 1/1/2015

Interest paid

Interest Expense

Discount/issue cost Amortization

Book Value

Bonds payable Cash

25. Effective Amortization bond premium and issue cost On January 1,2010, Naga Company issued 5-year bonds with face value of P10,000,000 at 105. The Nominal rate is 10% and the interest is payable annually on December 31. The bonds mature on January 1,2015. The company additionally paid bond issue cost of P200,000.00

Face Value Premium on bonds payable Issue price Bond issue cost Net proceeds PV of principal PVof interest payments Total PV of the bonds

1/1/2010

Cash Bonds payable Premium on bonds

1/31/2010

Interest Expense Cash Premium on bonds payable Interest Expense

DATE 1/1/2010 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014

Interest paid

Interest Expense

Premium Amortization

Book Value

1/1/2015

Bonds payable Cash