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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 payments at a stated rate until the
principal sum is paid.
A contract of debt (debt security) whereby one party called the issuer borrows fund from another
party called the investor.
Evidenced by a certificate and the contractual agreement is contained in a document known as
bond indenture.
Initial measurement
PFRS 9, paragraph 5.1.1, provides that bond investments are recognized initially at fair value plus
directly attributable transaction costs.
However, transaction costs attributable to the acquisition of bond investments held for trading
or at FVPL are expensed immediately.
Subsequent measurement
a. At FVPL
b. At FVOCI
c. At amortized cost
On April 1, purchased P1,000,000 12% bonds at 96 plus accrued interest. Interest is payable January 1 and July 1.
The bonds are held as trading investment.
Trading securities 960,000
Interest income 30,000
Cash 990,000
Received semiannual interest on July 1.
Cash 60,000
Interest income 60,000
On Oct. 31, sold P600,000 face value bonds for 101 plus accrued interest.
Cash 630,000
Trading securities 576,000
Interest income 24,000
Gain on sale of trading securities 30,000
During the life of the bonds, the investment account will appear as follows:
Investment in bonds
Feb. 1, 20x5 1,050,000 Dec. 31, 20x5 Amortization 11,000
Dec. 31, 20x6 Amortization 12,000
Dec. 31, 20x7 Amortization 12,000
Dec. 31, 20x8 Amortization 12,000
April 1, 20x9 Amortization 3,000
1,000,000 Balance April 1, 20x9 1,000,000
1,050,000 1,050,000
Callable bonds
Bonds that may be called in or redeemed by the issuing entity prior to their date of maturity.
Usually, the call price or redemption price is at a premium.
The difference between the redemption price and the carrying amount of the bond investment
on the date of redemption is recognized in P/L.
Convertible bonds
Bonds which give the bondholders the right to exchange their bonds for share capital of the
issuing entity at any time prior to maturity.
Investment in convertible bonds are classified as financial assets measured at fair value.
Serial bonds
Bonds which have a series of maturity dates or those which are payable in installments.
Term bonds
Bonds that mature on a single date.
Callable and convertible bonds can be classified as term bonds despite their special features.
Methods of amortization
a. Straight line method – provides for an equal amount of amortization each accounting period.
b. Bond outstanding method – applicable to serial bonds and provides for a decreasing amount of
amortization.
c. Effective interest method – provides for an increasing amount of amortization.
o Nominal rate – the coupon/stated rate appearing on the face of the bond.
o Effective rate – the yield/market rate which is the actual rate of interest which the
bondholder earns on the investment.
o Bond premium: Nominal > Effective
o Bond discount: Nominal < Effective
o PFRS 9, bond investments shall be classified as financial assets measured at amortized
cost using the effective interest method.
o The other methods are acceptable only when the computation will result in periodic
interest income that is not materially different from the amount that would be computed
using the effective interest method.
Discount Premium
Face amount of bonds 2,000,000 Face amount of bonds 4,000,000
Acquisition cost on Jan. 1, 20x5 1,900,000 Acquisition cost on Jan. 1, 20x5 4,200,000
Annual installment every Dec. 31 500,000 Annual installment every Dec. 31 1,000,000
Date of bonds Jan. 1, 20x5 Date of bonds Jan. 1, 20x5
Interest payable semiannually on Interest payable annually on
June 30 and Dec. 31 12% Dec. 31 12%
Acquisition on Jan. 1, 20x5: Acquisition on Jan. 1, 20x5:
Investment in bonds 1,900,000 Investment in bonds 4,200,000
Cash 1,900,000 Cash 4,200,000
Collection of interest on June 30, 20x5: Collection of interest on Dec. 31, 20x5:
Cash 120,000 Cash 480,000
Interest income 120,000 Interest income 480,000
Collection of interest on Dec. 31, 20x5: Amortization of premium:
Cash 120,000 Interest income 80,000
Interest income 120,000 Investment in bonds 80,000
Amortization of discount: Bond Premium
Investment in bonds 40,000 Year outstanding Fraction Amortization
Interest income 40,000
20x5 4,000,000 4/10 80,000
Bond Discount 20x6 3,000,000 3/10 60,000
Year outstanding Fraction Amortization 20x7 2,000,000 2/10 40,000
20x5 2,000,000 20/50 40,000 20x8 1,000,000 1/10 20,000
20x6 1,500,000 15/50 30,000 10,000,000 200,000
20x7 1,000,000 10/50 20,000
20x8 500,000 5/50 10,000 To record the first installment
5,000,000 50,000 Cash 1,000,000
Investment in bonds 1,000,000
To record the first installment Collection of interest on Dec. 31, 20x6:
Cash 500,000 Cash 480,000
Investment in bonds 500,000 Interest income 480,000
Collection of interest on June 30, 20x6: Amortization of premium:
Cash 120,000 Interest income 60,000
Interest income 120,000 Investment in bonds 60,000
Collection of interest on Dec. 31, 20x6:
Cash 120,000
Interest income 120,000
Amortization of discount:
Investment in bonds 30,000
Interest income 30,000
On Dec. 31, 20x5, the bond investment is measured at FVOCI. Assume the bonds are quoted at 102 on this date.
Financial asset - FVOCI 268,800
Unrealized gain - OCI 268,800
Cash 5,750,000
Unrealized gain – OCI 339,056
Financial asset – FVOCI 5,294,528
Gain on sale of financial asset 544,528
Interest income 250,000
The acquisition is at a discount, the effective rate > nominal rate of 10%.
Using the rate of 11%:
PV of principal (5,000,000 x .5935) 2,967,500
PV of future interest payments (500,000 x 3.6959) 1,847,950
Total PV of cash flows 4,815,450
Acquisition cost < PV of the bonds: The effective rate must be > 11%.
11% = 4,815,450
165,450
? = 4,650,000 176,050
12% = 4,639,400
165,450
= 11% + ( 𝑥 1%)
176,050
= 11% + .94%
= 11.94%
Another illustration
On Jan. 1, 20x5, an entity purchased bonds with face amount of P10,000,000 at 103 or P10,300,000. The nominal
rate is 10% payable annually on Dec. 31. The bonds mature on Jan. 1, 20y0, or a maturity of 5 years.
The acquisition is at a premium, the effective rate < nominal rate of 10%.
Using the rate of 9%:
PV of principal (10,000,000 x .6499) 6,499,000
PV of future interest payments (1,000,000 x 3.8897) 3,889,700
Total PV of cash flows 10,388,700
Acquisition cost < PV of the bonds: The effective rate must be > 9%.
9% = 10,388,700
88,700
? = 10,300,000 388,900
10% = 9,999,800
88,700
= 9% + ( 𝑥 1%)
388,900
= 9% + .23%
= 9.23%
2. 4% x 3,000,000 = 120,000 nom. > eff. 2. 6% x 3,000,000 = 180,000 nom. < eff.
3% x 3,000,000 = 90,000 8% x 3,000,000 = 240,000
Premium 30,000 Discount 60,000
2. 4% x 3,000,000 = 120,000 nom. > eff. 2. 3% x 3,000,000 = 90,000 nom. < eff.
3% x 3,000,000 = 90,000 4% x 3,000,000 = 120,000
Premium 30,000 Discount 30,000
This amount is the PP on Jan. 1, 20x5. To find the PP on This amount is the PP on Jan. 1, 20x5. To find the PP on
March 31, 20x5, it is necessary to prepare a partial table March 31, 20x5, it is necessary to prepare a partial table
of amortization. of amortization.
Date Interest Interest Premium Carrying Date Interest Interest Discount Carrying
received Income Amort. amount received Income Amort. amount
1/1/x5 3,255,906 1/1/x5 2,756,674
7/1/x5 120,000 97,677 22,323 3,233,583 7/1/x5 90,000 110,267 20,267 2,776,941
Carrying amount – Jan. 1, 20x5 3,255,906 Carrying amount – Jan. 1, 20x5 2,756,674
Less: Premium amort. from Jan. – March 11,161 Add: Discount amort. from Jan. – March 10,134
Carrying amount – March 31, 20x5 3,244,745 Carrying amount – March 31, 20x5 2,766,808
Add: Accrued interest from Jan. – March 60,000 Add: Accrued interest from Jan. – March 45,000
Total PP on March 31, 20x5 3,304,745 Total PP on March 31, 20x5 2,811,808