Bonds Payable

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.
• It is a contract of debt whereby one party called
the issuer borrows funds from another party
called the investor.
 Bonds Payable
• It is evidenced by a certificate and the
contractual agreement between the issuer and
the investor is contained in another document
called « bond indenture »
 Features of bond Issue
• A bond indenture or deed of trust is a
document which shows in detail the terms of
the loan and the rights and duties of the
borrower and other parties to the contract.

• Bond Certificates are used. Each bond

certificate reperesents a portion of the total
loan.
 Features of bond Issue
• If property is pledged as security for the loan,a
trustee is named to hold title to the property
serving as security.

• A bank or trust entity is usually appointed as

registrar or disbursing agent.
 Contents of Bond Indenture
• Characteristics of the bonds
• Maturity date and provision for repayment
• Period of grace allowed to issuing entity
• Establishment of a sinking fund and the
periodic deposit therein.
• Deposit to cover the interest payments
 Contents of Bond Indenture
• Provisions affecting the mortgaged property,
such as taxes, insurance coverage, collections
of interest or divideds on collaterals
• Access to corporate books and records of
trustee
• Certification of bonds by trustee
• Required debt to equity ratio
• Minimun working capital to be maintained, if
any.
 Types of Bonds
Term and Serial Bonds
Term Bonds are bonds with a single date of
maturity.
Serial Bonds are bonds with a series of
maturity dates instead of a single
one.
 Types of Bonds
Secured and Unsecured bonds
Mortgage Bonds are bonds secured by a
mortgage on real properties. These bonds
may be:
a. First mortgage bonds - bonds with senior claims on
entity assets.
b. Second mortgage bonds – bonds with subordinated
claims on entity assests
 Types of Bonds
Secured and Unsecured bonds

Collateral Trust bonds are bonds secured by

stocks and bonds of other corporation.

Debenture bonds are bonds without collateral

security. These bonds are unsecured and therefore
rank as general creditors in the preference of credits.
 Types of Bonds
Registered and Bearer Bonds

Registered Bonds require the registration of the

name of the bond holders on the books of the
corporation.

Coupon or Bearer Bonds are unregistered bonds in

the sense that the name of the bond holder is not
recorded on the entity books.
 Types of Bonds
Other Types of Bonds

Convertible bonds are bonds that may be exchanged

for shares of the issuing entity.

Callable bonds are bonds which may be called in for

redemption prior to the maturity date.
 Types of Bonds
Other Types of Bonds

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
weak in financial position.
 Problem
Glen Company had the following long term debt:
Sinking fund bonds maturing in installments: 2,200,000
Industrial revenue bonds maturing in istallments: 1,800,000
Subordinated bonds maturing on a single date: 3,000,000

What is the total amount of serial bonds?

Answer: 4,000,000
 Sale of Bonds
• Bonds are often divided into various denominations
of say P100, P1000, P10000, thus enabling more than
one buyer or investor to purchase the bonds.
• Often, instead of various denominations, bonds are
issued in equal denominations of, for example,
P1000.

Face Value
 Sale of Bonds

Thus, if 50,000,000 face value bonds are sold,

divided into P1000 denominations, there shall be
50,000 bond certificates containing a face amount of
P1000.
 Sale of Bonds

The sale of the bonds may be undertaken by the

entity itself or the entire bond issue may be sold to an
underwriter or investment bank that assumes
responsibility for reselling the bonds to investors.
 Sale of Bonds
Interest payments are usually paid semiannually or
every six months as follows:
a. January 1 and July 1
b. February 1 and August 1
c. March 1 and September 1
d. April 1 and October 1
e. May 1 and November 1
f. June 1 and December 1
 Initial measurement of
bonds Payable
• In accordance with PFRS 9, paragraph
5.1.1, bonds payable not designated
through profit or loss shall be measured
initially at fair value minus transaction
costs that are directly attributable to
the issue of the bonds payable.
 Initial measurement of
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.
 Initial measurement of
bonds Payable
• If the bonds are designated or
accounted for at fair value through
profit or loss, the bond issue costs are
treated as expense immediately
• The fair value of the bonds is the same
as the issue price or net proceeds from
the issue of the bonds, excluding
accrued interest..
Subsequent measurement
of bonds Payable
In accordance with PFRS 9, paragraph
5.3.1, after initial recognition, bonds
payable shall be measured either:

• At amortized cost, using the effective interest

method.
• 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
commulative amortization using the
effective interest method of any
difference between the initial amount
and the maturity amount.
 Amortized Cost of Bonds
Payable
• Simply stated, the difference between
the face amount and the present value
of the bonds payable is amortized using
the effective interest method.
• The difference between the face
amount and the present value is either
discount or premium on the discount of
bonds payable.
 Accounting for the
issuance of bonds payable
• Memorandum approach – no entry is
made upon the authorization of the
entity to issue bonds.
• Journal Entry approach – an entry is
prepared to record the authorized
bonds payable.
 Accounting for the
issuance of bonds payable
Illustration
An entity is authorized on January 1,
2012 to issue P5,000,000, 10-year, 12%, face
value bonds, interest payable January 1 and
July 1, consisting of 5000 units of P1000 face
value. The bonds are sold at face value to an
underwriter.
 Accounting for the
issuance of bonds payable
Memorandum approach:
« The entity is authorized on January 1,
2012 to issue P5,000,000 face value 10-year
12% bonds, dated January 1, 2012, interest
payable January 1 and July 1, consisting of 5000
units of P1000 face value »
 Accounting for the
issuance of bonds payable
Memorandum approach
Subsequent sale at face value:

Cash 5,000,000
Bonds Payable 5,000,000
 Accounting for the
issuance of bonds payable
Journal Entry approach
Authorization of bonds:

Unissued Bonds Payable 5,000,000

Authorized Bonds Payable 5,000,000
 Accounting for the
issuance of bonds payable
Journal Entry approach
Subsequent sale:

Cash 5,000,000
Unissued Bonds Payable 5,000,000
 Issuance of Bonds at a
Premium
If sales price is more than the face value of
the bonds, the bonds are said to be sold at
a premium.
Example:
An entity sells P5,000,000 face value bonds at
105. Thus the sales price is P5,250,000,
computed by:
5,000,000 x 105% = 5,250,000
 Issuance of Bonds at a
Premium
Entry to record sale:

Cash 5,250,000
Bonds Payable 5,000,000
Premium on Bonds Payable 250,000
 Issuance of Bonds at a
Premium
• The bond premium is in effect a gain on the
part of the issuing entity because it receives
more than what it is obligated to pay under
the terms of the bond issue.
• The bond premium however is not reported
as an outright gain.
• When the bonds are sold at a premium, it
means that the investor or buyer is is
amenable to receive interest that is less than
the nominal or stated rate of interest
 Issuance of Bonds at a
Premium
• The effective interest rate is less than the
nominal rate of interest.

• The nominal rate of interest is the rate

appearing on the face of the bond certificate

• Bond premium is amortized over the life of

the bonds and credited to interest expense.
 Issuance of Bonds at a
Premium
• If bonds in the previous example had a 10-
year life, the entry to record the
amortization of the bond premium is:

Premium on Bonds Payable 25,000

Interest Expense (250,000/10 years)25,000
 Issuance of Bonds at a
Discount
• If sales price of bonds is less than the face
value, the bonds are said to be sold at a
discount.
Example:
An entity sells P5,000,000 face value bonds at 95. The
sale of the bonds is recorded as follows:

Cash (5,000,000 x 95%) 4,750,000

Discount on Bonds Payable 250,000
Bonds Payable 5,000,000
 Issuance of Bonds at a
Discount
• The bond is in effect a loss to the issuing
entity.

• It is not treated as an outright loss. When

bonds are sold at a discount, it means that th
buyer or investor is not willing to accept
simply the nominal rate of interest.

• When bonds are sold at a discount, the

effective rate is higher than the nominal rate.
 Issuance of Bonds at a
Discount
• The bond discount is amortized as loss over
the life of the bonds and charged to interest
expense.

Interest Expense(250,000/10 years) 25,000

Discount on bonds payable 25,000
Presentation of discount or
premium
• The discount on bond payable is a deduction
from the bonds payable and the premium on
bonds payable is an addition to the bonds
payable.
Presentation of discount or
premium
Presentation in the statement of financial
Position:
Noncurrent liabilities:
Bonds Payable 5,000,000
Discount on Bond Payable ( 250,000) 4750,000
and
Noncurrent Liabilities
Bonds Payable 5,000,000
Premium on Bond Payable 250,000 5,250,000
 Recording Interest on
Bonds
Accounting for interest expense on bonds
requires for the recognition of two items
namely:

a. Payment of Interest during the year

b. Accrual of interest at the end of the year.

 Recording Interest on
Bonds
Example:
On March 1, 2012, an entity sells P5,000,000
face value bonds with 12% interest payable
semi annually on March 1 and Sept. 1.
Entries:

2012
Sept. 1 Interest Expense 300,000
Cash 300,000
Semiannual interest payment
( 5,000,000 x 12% x 6/12 =300,000)
 Recording Interest on
Bonds
Ecample:
On March 1, 2012, an entity sells P5,000,000
face value bonds with 12% interest payable
semi annually on March 1 and Sept. 1.
Entries:

2012
Dec. 31 Interest Expense 200,000
Accrued Interest Payable 200,000

Accrued Interest for 4 months

from Sept.1 to Dec. 31
( 5,000,000 x 12% x 4/12 =200,000)
 Recording Interest on
Bonds
Example:
On March 1, 2012, an entity sells P5,000,000
face value bonds with 12% interest payable
semi annually on March 1 and Sept. 1.
Entries:

2013
Jan. 1 Accrued Interest Payable 200,000
Interest Expense 200,000

Reversing Entry
 Recording Interest on
Bonds
Example:
On March 1, 2012, an entity sells P5,000,000
face value bonds with 12% interest payable
semi annually on March 1 and Sept. 1.
Entries:

2013
March 1 Interest Expense 300,000
Cash 300,000
 Recording Interest on
Bonds
Example:
On March 1, 2012, an entity sells P5,000,000
face value bonds with 12% interest payable
semi annually on March 1 and Sept. 1.
Entries:

2013
Sept 1 Interest Expense 300,000
Cash 300,000
 Recording Interest on
Bonds
Example:
On March 1, 2012, an entity sells P5,000,000
face value bonds with 12% interest payable
semi annually on March 1 and Sept. 1.
Entries:

2013
Dec. 31 Interest Expense 200,000
Accrued Interest Payable 200,000

Interest accrued for 4 months from Sept. 1 to Dec. 31, 2013

 Bond Issue Costs
• Bond Issue Costs or transaction costs are
incremental costs that are directly
attributable to the issue of bonds payable.
Such costs include:
– Printing and engraving costs
– Legal and accounting fee
– Registration fee with regulatory authorities
– Commissions paid to agents and underwriters
– Other similar charges
 Bond Issue Costs
• Bond Issue costs are not treated as outright
expense but amortized over the life of the
bond issue in a manner similar to that used
for discount on bonds payable.
• Bond issue costs are conceived as cost of
borrowing and therefore will increase the
interest expense.
Entry:

Interest Expense xxx

Bond issue cost xxx
 Bond Issue Costs
• Under PFRS 9, bond issue cost shall be
deducted from fair value or issue price of
bonds payable in measuring initially the
bonds payable.

• Under the effective interest method, the

bond issue cost must be lumped with the
discount on bonds payable and netted
against the premium on bonds payable.
 Problem
On April 1, 2012, Greg Company issued at 99
plus accrued interest, 4000 of its 8% P1000
bonds. The bonds are dated on January 1 2012,
mature on January 1, 2022, and pay interest on
January 1 and July 1. Greg Company paid bond
issue costs of P140,000.
What should be reported as bond liability on
April 1, 2012?
Answer: 3,820,000
 Solution
Bond payable face amount 4000,000
Less : discount 40,000
bond issue cost 140,000
Carrying amount 3,820,000
 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entries:
2012
June 1 Cash 4,850,000
Discount on Bonds Payable 150,000
Bonds Payable 5,000,000
 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entries:
2012
Dec. 1 Interest Expense 300,000
Cash 300,000

Semiannual Interest Payment

 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entries:
2012
Dec. 31 Interest Expense 50,000
Accrued Interest Payable 50,000

(5,000,000 x 12% x 1/12 = 50,000)

 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entries:
2012
Dec. 31 Interest Expense 17,500
Discount on Bond Payable 17,500

(150,000/5years = P30,000)
(P30,000 x 7/12 = P17, 500)
 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entry:
2013
Jan. 1 Accrued Interest Payable 50,000
Interest Expense 50,000
 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entry:
2013
June 1 Interest Expense 300,000
Cash 300,000

Semiannual interest payment

 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entry:
2013
Dec 1 Interest Expense 300,000
Cash 300,000

Semiannual interest payment

 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entry:
2013
Dec 31 Interest Expense 50,000
Accrued Interest Payable 50,000

Interest Accrues for one month

 Issuance of bonds on
Interest date
Example:
On June 1, 2012 an entity sells P5,000,000 face
value bonds at 97. The bonds mature in 5 years
and pay 12% interest semiannually on June 1
and Dec. 1.
Entry:
2013
Dec 31 Interest Expense 30,000
Discount on bondPayable 30,000

Amortization of bond discount

 Problem
On March 1, 2012 Cain Company issued 103
plus accrued interest 4,000 of its 9%, P1000
face value bonds. The bonds are dated January
1, 2012 and mature on January 1, 2022.
Interest is payable semiannually on March.1
and Sept. 1 Cain Company paid bond issue cost
of P200,000.
How much interest is paid on March 1, 2012?
Answer: 0
How much interest is paid on Sept 1, 2012?
Answer: 180,000
 Solution
1. 0
2. 4,000,000 x 9% x ½ = 180,000
Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on January 1 and July 1.
Entry:
Sale
Cash 5, 378, 000
Bonds Payable 5,000,000
Premium on bonds payable 228,000
Interest Expense 150,000
Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on January 1 and July 1.
Entry:
July 1 Interest Expense 300,000
cash 300,000
The investor pays for the interest accrued for three months because
on July 1, the investor is going to receive interest for 6 months from
Jan. 1 to July 1, 2012.
5,000,000 x 12% x 6/12 = 300,000
Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on Januaey 1 and July 1.
Entry:
Another Approach
Cash 5,378,000
Bonds Payable 5,000,000
Premium on Bonds Payable 228,000
Accrued Interest Payable 150,000
Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on January 1 and July 1.
Entry:
Another Approach
Accrued Interest Payable 150,000
Interest Expense 150,000
Cash 300,000
The debit balance of the interest expense account must be 150,000,
the correct interest expense.
Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on January 1 and July 1.
Entry:
Adjusting Entries
Interest Expense 300,000
Accrued Interest Payable 300,000

Accrued Interest Expense from July 1 to Dec 31.

Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on January 1 and July 1.
Entry:
Adjusting Entries
Premium on Bonds Payable 36,000
Interest Expense 36,000

Accrued Interest Expense from July 1 to Dec 31.

Issuance of bonds between
Interest dates
Example:
On April 1, 2012, an entity sells P5,000,000 face
value bonds at P5,228,000 plus accrued
interest. The bonds are dated January 1, 2012,
mature in 5 years and pay 12% interest
semiannually on January 1 and July 1.

Original Life of bonds ( 5years x 12) 60 months

Less: expired life on date of sale 3 months
(Jan. 1 to April 1)
Remaining life of bonds 57
Monthly amortization (228,000/57) 4000
April 1 to Dec. 31 (4000 x 9) 36,000
 Problem
On March 1, 2012 Cain Company issued 103
plus accrued interest 4,000 of its 9%, P1000
face value bonds. The bonds are dated January
1, 2012 and mature on January 1, 2022.
Interest is payable semiannually on Jan.1 and
July 1 Cain Company paid bond issue cost of
P200,000.
How much interest is paid by the investor?
Answer: 60,000
How much is the total cash received?
Answer: 4,180,000
 Solution
4,000,000 X 9% x 2/12 = 60,000
Total cash
4,000,000 x 103% = 4, 120,000
Add. Interest accrued 60,000
4,180,000
 Bond Retirement on
Maturity Date
• Sinking Fund or Redemption Fund is a fund
set aside for the liquidation of long term
debt, more particularly bonds payable. As a
rule it is classified as noncurrent investment

• If the related bond payable is due to be

settled within 12 months after the end of the
reporting period, the sinking fund shall be
reclassified as current asset because the
bond payable is also reclassified as current
liability.
 Bond Retirement on
Maturity Date
• The Classification of a cash fund shall parallel
to the classification applied to the related
liability.
 Bond Retirement on
Maturity Date
• When bonds are paid on the date of
maturity, no accounting problem is
encountered.

• This would simply require the cancellation of

the bonds payable and of course the
payment of accrued interest on the date of
maturity.
 Bond Retirement on
Maturity Date
Example:
An entity sells P5,000,000 face value bonds on
March 1, 2012 with 12% interest payable on
March 1 and Sept. 1 and the bonds mature on
March 1, 2017.
Entry:

2017
March 1 Bonds Payable 5,000,000
Interest Expense 300,000

Sinking Fund 5,300,000

to record retirement of bonds

 Bond Retirement on
Maturity Date
Example:
An entity sells P5,000,000 face value bonds on
March 1, 2012 with 12% interest payable on
March 1 and Sept. 1 and the bonds mature on
March 1, 2017.
Entry:

2017
March 1 Bonds Payable 5,000,000
Interest Expense 300,000

Cash 5,300,000

to record retirement of bonds

 Bond Retirement prior to
Maturity Date
When bonds are reacquired prior to maturity
date, they may be cancelled or permanently
retired, or held in the treasury for future
reissue when the need for fund arises.
 Bond Retirement prior to
Maturity Date
In the retirement of bonds prior to maturity
date, the following procedures are followed:

1. The bond premium or bond discount and

issue cost should be amortized up to the
date of retirement.
2. The balance of the bond premium or
discount and the issue cost should be
determined.
3. The accrued interest to date of retirement
should be determined.
 Bond Retirement prior to
Maturity Date
In the retirement of bonds prior to maturity
date, the following procedures are followed:

4. The total cash payment should be computed.

This is equal to the retirement price plus
accrued interest. The retirement price is
a certain percent of the face value of
the bonds.
5. The carrying amount of the bonds retired is
determined.
 Bond Retirement prior to
Maturity Date
In the retirement of bonds prior to maturity
date, the following procedures are followed:

6. The gain or loss on retirement of bonds is

computed
Retirement price > carrying amount = loss
Retirement price < Carrying amount =gain
 Bond Retirement prior to
Maturity Date
In the retirement of bonds prior to maturity
date, the following proceedures are followed:

7. The retirement of the bonds is then recorded

by canceling the bond liability together with
the unamortized premium or discount and
issue cost. Any accrued interest is debited to
interest expense
 Bond Retirement prior to
Maturity Date
Illustration:
On March 1, 2012, P5,000,000 face value bonds
are sold for P4,730,000. The bonds are dated
March 1, 2012 and mature in 5 years and pay
12% interest semiannually on March 1 and
Sept. 1.
All of the bonds are retired on July 1, 2015 at
97. The procedures for retirement are:
 Bond Retirement prior to
Maturity Date
Illustration:
1.

2012
Dec. 1 Interest Expense 27,000
Discount on bonds Payable 27,000

(270,000/5 years =54,000 annual amortization)

(54,000 x ½ = 27,000)
from Jan 1 to July 1
 Bond Retirement prior to
Maturity Date
Illustration:
2. The balance of the discount is computed as
follows:

Discount on Bonds Payable March 1, 2012 270,000

Less: Amortized from March 1, 2012
To July 1, 2015 or 40 months (40/60 x 270,000) 180,000
Balance July 1, 2015 90,000
 Bond Retirement prior to
Maturity Date
Illustration:
3. Accrued interest on date of retirement

5,000,000 x 12% x 4/12 = 200,000

Last interest payment was on March 1, 2015 so
there is accrued interest for 4 months.
 Bond Retirement prior to
Maturity Date
Illustration:
4. Total Cash Payment

Retirement Price (5,000,000 x 97%) 4,850,000

Add: Accrued Interest 200,000
Total cash Payment 5,050,000
 Bond Retirement prior to
Maturity Date
Illustration:
5. Carrying amount of the bonds

Bonds Payable 5,000,000

Discount on bonds payable (90,000)
Carrying amount 4,910,000
 Bond Retirement prior to
Maturity Date
Illustration:
6. Gain or loss on early retirement:

Carrying amount of Bonds Payable 4,910,000

Less : retirement price (4,850,000)
Gain on retirement 60,000
 Bond Retirement prior to
Maturity Date
Illustration:
7. Entry to record retirement of bonds on July
1, 2015

Bonds Payable 5,000,000

Interest Expense 200,000
Cash 5,050,000
Discount on Bonds Payable 90,000
Gain on early retirement of bonds 60,000
 Treasury Bonds
Treasury Bonds are an entity’s own bonds
originally issued and reaquired but not
cancelled.

The acquisition of treasury bonds calls for the

same accounting proceedures accorded to
formal retirement of bonds prior to maturity
date.
 Treasury Bonds

Treasury bonds should be debited at face value

and any related unamortized premium or
discount or issue cost should be cancelled. Any
accrued interest paid should be charged to
interest expense.
 Treasury Bonds
Illustration:
An entity originally issued P5,000,000 face
value bonds at 105 or a premium of 250,000.
Subsequently, the entity reacquired P1000,000
face value bonds to be placed in the treasury at
103.
At the time of reacquisition, the unamortized
premium balance is P200,000 and the accrued
interest on the treasury bonds is P30,000
 Treasury Bonds
Illustration:
Entry:

Treasury Bonds 1,000,000

Premium on Bonds Payable 40,000
Interest Expense 30,000
Cash 1,060,000
Gain on early retirement of bonds 10,000
 Treasury Bonds
Illustration:
Computation:
Face Value of the bonds 1,000,000
Applicable premium
(1000,000/5,000,000 x 200,000) 40,000
Carrying amount 1,040,000
Less: Acquisition price 1,030,000
Gain on reacquisition 10,000
Reacquisition Price 1,030,000
Accrued Interest on bonds 30,000
Total Cash payment 1,060,000
 Treasury Bonds
Illustration:
Entry on subsequent sale of 1,000,000 treasury
bonds for 1,200,000

Cash 1,200,000
Treasury bonds 1,000,000
Premium on bonds payable 200,000
 Treasury Bonds
Illustration:
Entry on subsequent sale of 1,000,000 treasury
bonds for 900,000

Cash 900,000
Discount on bonds payable 100,000
Treasury bonds 1,000,000
 Treasury Bonds
Illustration:
If bonds are not subsequently sold:

Bonds Payable 1,000,000

Treasury bonds 1,000,000
 Treasury Bonds
Illustration:

Statement representation:
Bonds Payable 5,000,000
Treasury Bonds (1,000,000)
Bonds issued and outstanding 4,000,000
Premium on bonds payable 160,000
Carrying amount 4,160,000
 Bond Refunding
Bond refunding is the floating of new bonds the
proceeds of which are used in paying the
original bonds.
• It is the premature retirement of the old
bonds by means of issuing new bonds.
• Refunding may be made on or before the
maturity of the old bonds.
• If refunding is made prior to maturity date of
the old bonds, consideration must be given
to the refunding charges of the old bonds.
 Bond Refunding
• Bond refunding shall be accounted for as
extinguishment of a financial liability.

• The difference between the carrying amount

of the financial liability extinguished and the
consideration paid shall be included on
profit or loss.
• Refunding charges are charged to loss on
extinguishment.
 Bond Refunding
Illustration:
1. Issuance of new 10-year bonds, with face
value of 1,500,000 for 1,600,000.
2. Refunding of 12% bonds, with remaining life
of 4 years at 102.
Bonds payable old 1,000,000
Discount on bonds payable 30,000
Retirement price (1000,000 x 102) 1,020,000
 Bond Refunding
Illustration:
Entries:
1. Issuance of new bonds Payable:

Cash 1,600,000
Bonds Payable 1,500,000
Premium on bonds payable 100,000
 Bond Refunding
Illustration:
Entries:
2. Retirement of old bonds payable:

Bonds Payable 1,000,000

Loss on extinguishment of bonds 50,000
Cash 1,020,000
Discount on bonds payable 30,000
 Bond Refunding
Loss on extinguishment:
Unamortized discount 30,000
Redemption Premium (1,000,000 x 2%) 20,000
Total refunding charges 50,000
or
Bond Payable 1,000,000
Discount (30,000)
Carrying amount 970,000
Less retirement price (1,020,000)
Loss on extinguishment (50,000)
 Amortization of Bond
Discount or premium
a. Straight Line
b. Bond outstanding method
c. Effective interest method or interest
method.
 Amortization of Bond
Discount or premium
• PFRS 9 provides that after initial recognition,
an entity shall measure all financial liabilities
either at amortized cost using the effective
interest method or at fair value through
profit or loss.
• Under USA GAAP, APB Opinion no. 21
provides that the straight like method and
bond outstanding method are acceptable if
the periodic interest expense is not
materially different from the amount
obtained using the effective interest method.
 Amortization of Bond
Discount or premium
Straight line method
-the procedure is simply to divide the
amount of bond premium or discount by the
life of the bonds to arrive at the periodic
amortization.
- the life of the bonds is the period
commencing on the date of sale of the bonds
up to the maturity date.
 Amortization of Bond
Discount or premium
Bond outstanding method
-applicable to serial bonds weather
issued at a discount of premium.
- It gives recognition to the diminishing
balance of the bonds.
 Amortization of Bond
Discount or premium
illustration
Face value 5,000,000
Issue price 5,300,000
Date of bonds Jan, 1 2012
Date of issue Jan, 1 2012
Interest rate 12%
Semiannual interest dates June 30 and dec.
31
The bonds mature every Dec. 31 of each year at
the rate of 1,000,000 for 5 years.
 Amortiztion of Bond
Discount or premium
illustration
Table of amortization:
Year Bond outstanding Fraction Amortization
2012 5,000,000 5/15 100,000
2013 4,000,000 4/15 80,000
2014 3,000,000 3/15 60,000
2015 2,000,000 2/15 40,000
2016 1,000,000 1/15 20,000
15,000,000 300,000
 Amortization of Bond
Discount or premium
illustration
Entries:

2012
Jan. 1 Cash 5,300,000
Bonds Payable 5,000,000
Premium on bonds payable 300,000
 Amortization of Bond
Discount or premium
illustration
Entries:

2012
June 30 Interest Expense 300,000
Cash 300,000
 Amortization of Bond
Discount or premium
illustration
Entries:

2012
Dec. 31 Interest Expense 300,000
Cash 300,000
Premium on bonds payable 100,000
Interest expense 100,000
Bonds Payable 1,000,000
Cash 1,000,000