BONDS PAYABLE

A bond is a formal unconditional promise, made under seal, to pay a specified sum of money at
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 (bond indenture) whereby one party called the
issuer borrows funds from another party called the investor. A bond is evidence by a certificate.

Initial Measurement of Bonds Payable (PFRS 9)

Classification
Fair value through profit or loss – Fair value
Not designated at FVPL – Fair value minus transaction cost (Bond issue cost)
Or
Present Value
Or
Issue Price

Subsequent Measurement of Bonds Payable (PFRS 9)

Bonds Payable shall be subsequently measured either:

1. At amortized cost, using effective interest method

Initial Measurement xx
Principal repayments (xx)
Cumulative Amortization of Premium (xx)
Cumulative Amortization of Discount xx
Amortized Cost/Carrying amount of B/P xx

OR
Face Value/ Principal xx
Principal repayments (xx)
Unamortized Premium xx
Unamortized Discount (xx)
Amortized Cost/Carrying amount of B/P xx

2. At fair value through profit or loss (fair value option)

Amortized Cost of Bonds Payable

Initial Measurement > Face Amount = Premium on Bonds Payable (Credit) = ER < NR
Initial Measurement < Face Amount = Discount on Bonds Payable (Debit) = ER > NR

Discount on Bonds Payable – is a deduction from the bonds payable (valuation account) – contra
liability
 Premium on Bonds Payable – is an addition to the bonds payable (valuation account) – adjunct
account

Bond Issue Cost – transaction costs directly attributable to the issue of bonds payable. Such
costs include printing and engraving cost, legal and accounting fee, registration fee, commissions paid
to agents and underwriters and other similar charges.

(PFRS 9) Bond issue cost shall be deducted from the fair value or issue price of bonds payable
in measuring initially the bonds.

Under 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 outright.

Premium and Discount are subject to amortization based on the life of the bonds. Life of the
bonds will commence on the date of issuance up to the maturity date.

3 types of Amortization Method

a. Straight line method = equal amortization
b. Bond Outstanding Method = decreasing amortization (applicable only for serial
bonds)
c. Effective Interest Method = increasing amortization

Amortization Table (Term Bonds)

Date Interest Paid Interest expense Amortization AC/CA

A B C D
(FV/P x NR) (D x ER) (A – B) (D+-C)
 Amortization Table (Serial Bonds)

Date Interest Paid Interest Exp. Amortization Principal AC/CA

Repayment
A B C D E
(FV or P x NR) (E x ER) (A-B) (E+-C-D)

Recording of Interest on Bonds

a. Payment of interest during the year
b. Accrual of interest at the end of the year

Issuance of Bonds
a. On interest dates
Cash
Bonds Payable

b. Between interest dates

Principal + Accrued Interest

Presentation in the FS
Accrued Interest Payable – classified as current liability
Amortized Cost/Carrying amount of Bonds Payable – Non-current Liability

Illustrations

Illustration 1: On June 1, 2020, an entity issue bonds with face amount of 5,000,000 at 97.
The bonds mature in 5 years and pay 12% interest semiannually on June 1, and December 1.

Journal Entry (Memorandum Approach)

Initial Measurement (5,000,000 x .97) 4,850,000

Face Value 5,000,000
Discount on Bonds Payable 150,000

2020
June 1 Cash (5,000,000 x.97) 4,850,000
Discount on Notes Payable 150,000
Bonds Payable 5,000,000

December 1
Interest Expense (5,000,000 x 12% x 6/12) 300,000
Cash 300,000

December 31
Interest expense (5,000,000 x 12% x 1/12) 50,000
Accrued Interest Payable 50,000

Interest Expense (150,000/5years x 7/12) 17,500

Discount on Notes Payable 17,500

Presentation for 2020 FS

Current Liability
Accrued interest Payable 17,500
 Non-current Liability
Initial Measurement 4,850,000
Cumulative Amort. of disc. 17,500
Amortized Cost, Dec. 31, 2020 4,867,500
or
Face Value 5,000,000
Discount on BP 150,000
Amortization (17,500)
Unamortized discount (132,500)
Amortized Cost, Dec. 31, 2020 4,867,500

2021
Jan 1 Accrued interest payable 50,000
Interest expense 50,000

June 1 Interest Expense 300,000

Cash 300,000

Dec 1 Interest Expense 300,000

Cash 300,000

Dec 31 Interest Expense 50,000

Accrued Interest Payable 50,000

Interest Expense (150,000/5 yrs) 30,000

Discount on Bonds Payable 30,000

Illustration 2: On April 1, 2020, an entity issued bonds with face amount of 5,000,000 at 5,228,000
plus accrued interest. The bonds are dated January 1,2020, matures in 5 years and pay 12% interest
semiannually on January 1 and July 1.

Initial Measurement 5,228,000

Face Value (5,000,000)
Premium on Bonds 228,000

Issue Price 5,228,000

Accrued interest from Jan 1 – April 1 (5M x 12% x 3/12) 150,000
Total Cash received 5,378,000

2020
April 1
Cash 5,378,000
Bonds Payable 5,000,000
Premium on BP 228,000
Interest Expense 150,000

July 1
Interest Expense (5M x 12% x 6/12) 300,000
Cash 300,000

December 31
Interest Expense (July 1 – Dec 31) 300,000
Accrued Interest Payable 300,000

Amortization will commence on the date of issue up to Maturity date.

(5 yrs x 12 mos = 60 mos – 3 mos =
Premium on Bonds Payable (228,000/57 mos x 9 mos) 36,000
Interest Expense 36,000
Illustration 3:
Face Amount 5,000,000
Nominal rate 12%
Effective rate 10%

The bonds are issued on January 1, 2020 and mature in three years on January 1, 2023. The
interest is payable semiannually every June 30 and December 31.

PV of 1 = (1+EF)^-n = (1+.05)^-6 = .7462

PV of OA of 1 = 1-(1+EF)^-n = 1 – (1+.05)^-6 = 5.0757
ER .05

Principal 5,000,000 x .7462 = 3,731,000

Interest (5M x 12% x 6/12) 300,000 x 5.0757 = 1,522,710
Present Value 5,253,710
Face Value/Principal (5,000,000)
Premium 253,710

Amortization Table

Date Interest Paid Interest Expense Amortization Amortized Cost

January 1, 2020 5,253,710.00
June 30, 2020 300,000.00 262,685.50 37,314.50 5,216,395.50
December 31, 2020 300,000.00 260,819.78 39,180.23 5,177,215.28
June 30, 2021 300,000.00 258,860.76 41,139.24 5,136,076.04
December 31, 2021 300,000.00 256,803.80 43,196.20 5,092,879.84
June 30, 2022 300,000.00 254,643.99 45,356.01 5,047,523.83
December 31, 2022 300,000.00 252,476.17 47,523.83 5,000,000.00

Bond Retirement – Payment of Bonds Payable

1. At Maturity Date
BP 5,000,000
Cash 5,000,000

2. Prior to maturity Date

Retirement Price xx
Accrued interest to date of retirement xx
Total Cash Payment xx

Retirement Price xx
CA of bonds retired (xx)
Loss (gain) xx (xx)

Face value of the bonds retired xx

Unamortized Premium of the bonds retired at the date of retirement xx
Unamortized Discount of the bonds retired at the date of retirement (xx)
Carrying Amount of the bonds retires xx
Bonds Payable xx
Premium xx
Interest Expense xx
Loss on early retirement xx
Discount xx
Cash xx
Gain on Early retirement xx
Fair Value Option of Measuring the Bonds

PFRS 9, par 4.2.2, provides that at initial recognition bonds payable may be irrevocably
designated as at fair value through profit or loss. Subsequent measurement is at fair value. Changes
in fair values shall be recognized in profit or loss.

No more amortization of discount, premium and bond issue cost.

Interest expense is recognized using the nominal or stated rate.

Bond issue cost is expensed outright.