BONDS PAYABLE
ACC 102- INTERMEDIATE ACCOUNTING
BONDS
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.
Contract of debt whereby one party called the ISSUER borrows funds from another
party called the INVESTOR
BOND INDENTURE
Evidenced by a CERTIFICATE and the contractual agreement between the issuer and investor
TERMS AND SERIAL BONDS
TERM BONDS
Bonds with a single date of maturity
Require the issuing entity to establish a sinking fund to provide adequate money
to retire the bond issue at one time.
SERIAL BONDS
Bonds with a series of maturity dates instead of a single one.
Allow the issuing entity to retire the bonds in installment
SECURED AND UNSECURED BONDS
MORTGAGE BONDS
bonds secured by a mortgage on real properties
COLLATERAL TRUST BONDS
Bonds secured by shares and bonds of other corporations
DEBENTURE BONDS
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 the 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 the bondholders of record.
COUPON OR BEARER BONDS
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
Interest is paid to the person submitting a detachable interest coupon
OTHER TYPES OF BONDS
CONVERTIBLE BONDS
Can be exchanged for shares if the issuing entity
CALLABLE BONDS
Bonds which may be called in for redemption prior to the maturity date
GUARANTEED BONDS
Bonds issued whereby another party promises to make payment if the borrower
fails to do so
JUNK BONDS
high—risk, high-yield bonds issued by entities that are heavily indebted or
otherwise in weak financial condition
ZERO-COUPON BONDS
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.
FEATURES OF BOND ISSUE
BOND INDENTURE OR DEEED OF TRUST
Document which shows in detail the terms of the loan and the rights and duties
of the borrower and other parties of the contract
BOND CERTIFICATES
Each bond certificate represents a portion of the total loan
Usual minimum denomination in business practice is P1,000, although smaller
denominations may be issued occasionally.
TRUSTEE
Named to hold title of the property serving as security
Acts as the representative of the bondholders and it usually a bank or trust entity
BANK OR TRUST ENTITY
Usually appointed as registrar or distributing agent
BOND INDENTURE
Contract between the bondholders and the borrower or issuing entity
Contents:
a. Characteristics of the bond
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 in 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
SALE OF BONDS
can be undertaken by the entity itself
normally, the issuing entity does not attempt to sell the bonds directly to the
public
UNDERWRITER OR INVESTMENT BANK
Buyer of the bond issue sold
Assumes the responsibility of reselling the bonds to investors
Undertakes to sell the bonds on the basis of a commission to be deducted from
the proceeds of sale
When an entity sells a bond issue, it undertakes to pay the FACE AMOUNT of the
BOND ISSUE on maturity date and the periodic interest
Interest is usually payable bi-annually or every six months
There are certain bonds that pay interest annually of at the end of every bond year
INITIAL MEASUREMENT OF BONDS
PAYABLE
Bonds Payable not designated at Fair Value through profit or loss shall be
measured initially at
FAIR VALUE TRANSACTION
(PRESENT VALUE COSTS directly
OF THE FUTURE attributable to
CASH PAYMENTS the issue of Bonds
TO SETTLE A BOND Payable (bond
LIABILITY issue costs)
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
Bonds Payable designated at Fair Value through profit or loss BOND ISSUE
COST is treated as an expense
SUBSEQUENT MEASUREMENT OF BONDS
PAYABLE
At amortized cost, using the effective interest method
At Fair value through profit or loss
AMORTIZED COST OF BONDS PAYABLE
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.
Difference between the face amount and the present value is either
discount or premium on the issue of bonds payable
TWO APPROACHES IN ACCOUNTING
FOR ISSUANCE OF BONDS
MEMORANDUM APPROACH
SALE OF BONDS AT FACE AMOUNT
Cash xx
Bonds Payable xx
JOURNAL ENTRY APPROACH
AUTHORIZATION OF THE BONDS
Unissued Bonds Payable xx
Authorized Bonds Payable xx
SALE OF BONDS AT FACE AMOUNT
Cash xx
Unissued Bonds Payable xx
BOND ISSUE COSTS
Transaction costs directly attributable to the issue of bonds payable
Shall be deducted from the fair value or issue price of bonds payable in
measuring initially the bonds payable
Includes:
Printing and engraving cost;
Legal and accounting fee;
Registration fee with regulatory authorities;
Commission paid to agents and underwriters; and
Other similar charges
“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
bolds payable.”
BOND RETIREMENT PRIOR TO MATURITY
DATE
Procedures to follow if the reacquired bonds are cancelled and
permanently retires
1. The bond premium or discount should be amortized up to the date of retirement
2. The balance of the bond premium or discount should be determined.
3. The accrued interest to date of retirement should be determined.
4. The total cash payment should be computed. This is equal to the retirement price
plus accrued interest.
5. The carrying amount of the bonds retired is determined
6. The gain or loss on the retirement of the bonds is computed
7. The retirement of the bonds is then recorded by cancelling the bond liability
together with the unamortized premium or discount
TREASURY BONDS
Entity’s own bonds originally issued and reacquired but not cancelled.
Acquisition of treasury bonds calls for the same accounting procedures
accorded to a formal retirement of bonds prior to the maturity date.
Debited at FACE AMOUNT and any related unamortized premium or
discount should be cancelled
Any accrued interest paid is charged to interest expense
GAIN (LOSS) ON THE ACQUISITION OF TREASURE BONDS
Difference between the acquisition cost and the carrying amount of the treasury
bonds
BOND REFUNDING or BOND
REFINANCING
floating of new bonds the proceeds from which are used in paying the
original bonds
Premature retirement of the old bonds by means of issuing new bonds.
may be made on or before the date of maturity of the old bonds
Accounted for as an extinguishment of financial liability
Refunding charges are charged to loss on extinguishment.
APPROACHES IN THE AMORITZATION OF
BOND DISCOUNT OR PREMIUM
Straight Line
Bond Outstanding Method
Effective interest method/ interest method or scientific method
STRAIGHT LINE METHOD
Provides as equal amortization of bond premium and bond discount
PROCEDURES
Divide the amount of bond premium or bond discount by the life of the bonds
to arrive at the periodic amortization
LIFE OF BONDS
Period commencing on the date of sale of the bonds up to the maturity date
BOND OUTSTANDING METHOD
Applicable to serial bonds whether issued at discount or premium
Gives recognition to the diminishing balance of the bonds
Based on the theory that interest expense shall decrease every year by
reason of the decreasing principal bond liability
ANNUAL PREMIUM AMORTIZATION
Computed by multiplying the fractions by the amount of premium
PREMATURE RETIREMENT OF SERIAL
BONDS
Calls for the cancellation of any unamortized discount or premium related
to the serial bonds retired
