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LONG TERM LIABILITIES

BONDS PAYABLE – unconditional promise, made under seal, to pay a specified sum of money at a
determinable future date, and to make periodic ineterest payment at a stated rate until the principal
sum is paid; contract of debt

- Evidenced by:
 Bond Indenture – legal contract between the issuer and investor that specifies the
scope and responsibilities of the brrower and other details.
 Bond certificate – legal document describing the indebtedness of a borrower and
the terms of payment.

TYPES OF BONDS

- TERM BONDS
o Bonds with a single date of maturity
- SERIAL BONDS
o Bonds with a series of maturity dates; installments
- MORTGAGE BONDS
o Secured by a mortgage on real properties
- COLLATERAL TRUST BONDS
o Secured by stocks and bonds of other corporation
- DEBENTURE BONDS
o Bonds without collateral security
- REGISTERED BONDS
o Require the registration of the name of the bondholder on the books of the corporation
- BEARER BONDS
o Bondholders are not recorded on the books
- CONVERTIBLE BONDS
o Bonds that can be exchanged for shares of the issuing entity
- CALLABLE BONDS
o Bonds which may be called in for redemption prior to the maturity date
- GUARANTEED BONDS
o Another party promises to make payment if the borrower fails to do so
- JUNK BONDS
o High-risk, high-yield bonds issued by entities that are heavily indebted or otherwise in
weak financial condition

Initial measurement: FAIR VALUE

Subsequent measurement:

- AMORTIZED COST (effective interest method)

- FAIR VALUE THROUGH PRFOFIT OR LOSS

ISSUANCE OF BONDS

MEMORANDUM JOURNAL ENTRY

upon issuance No entry/memo Unissued Bonds Payable
Authorized Bonds Payable

subsequent sale Cash Cash

Bonds Payable Unissued Bonds Payable
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at PAR above par/premium below par/discount

ER=NR ER<NR ER>NR

ISSUANCE OF BONDS AT A PREMIUM

- Sales price is more than the face value of the bonds

- Effective rate < Nominal Rate

Illustration:

A entity issued bonds with a face amount of 2M at a quoted price of 103.

Cash (2M x 1.03) 2,060,000

Bonds Payable 2,000,000

Premium on Bonds Payable 60,000

ISSUANCE OF BONDS AT A DISCOUNT

- Sales price is less than the face value of bonds

- Effective rate > Nominal Rate

Illustration:

An entity issued bonds with a face amount of 2M at a quoted price of 98.

Cash (2M x 0.95) 1,900,000

Discount on Bonds Payable 100,000

Bonds Payable 2,000,000

INTEREST ON BONDS

On May 31, 2018, an entity issiued bonds with a face amount of 1M and 10% ineterest payable
semiannually on May 1 and October 1.

- Payment of interest during the year

10/31/18 Interest Expense (1M x 0.10 x ½) 50,000

Cash 50,000

- Accrual of interest

12/31/18 Interest Expense (1M x 0.10 x 3/12) 25,000

Accrued Interest Payable 25,000

BOND ISSUE COST

- Tansaction costs that ae directly attributable to the issue of bonds payable

o Printing and engraving
o Legal and accounting fee
o Registration fee with regulatory auhtorities
o Commissions paid to agents and underwriters
- Shall be deducted from the fair value or issue price
- Expensed if bonds are measured at fair value through profit or loss

ISSUANCE OF BONDS ON INTEREST DATES

On August 1, 2018, the entity issued 1M 4-yr bonds with a face amount of 1M at 102 that pays
10% semiannually on August 1 and November 1.
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8/1/18 Cash (1M x 1.02) 1,020,000

Premium on Bonds Payable 20,000

Bonds Payable 1,000,000

11/01/18 Interest Expense (1M x 0.10 x ½) 50,000

Cash 50,000

12/31/18 Interest Expense (1M x 0.10 x 2/12) 16,667

Accrued Interest Payable 16,667

Premium on Bonds Payable 2,083

Interest Expense 2,083

[(20,000/4) x 5/12]

ISSUANCE OF BONDS BETWEEN INTEREST DATES

On September 1, 2018, the entity issued 1M 4-yr bonds with a face amount of 1M at 102 that
pays 10% semiannually on August 1 and November 1.

Issue Price 1,020,000

Accrued Interest (1M x 0.10 x 1/12) 8,333

Total cash received 1,028,333

9/1/18 Cash 1,028,333

Premium on Bonds Payable 20,000

Bonds Payable 1,000,000

Interest Expense 8,333

11/01/18 Interest Expense (1M x 0.10 x ½) 50,000

Cash 50,000

12/31/18 Interest Expense (1M x 0.10 x 2/12) 16,667

Accrued Interest Payable 16,667

Premium on Bonds Payable 1,702

Interest Expense 1,702

(20,000/47months x 4)

Original life of bonds (4yrs x 12) 48months

Less: Expired life 1month

Remaining life 47months

BOND RETIREMENT

On August 1, 2018, the entity issued 1M 4-yr bonds with a face amount of 1M at 98 that pays
10% semiannually on August 1 and November 1.
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Retirement on Maturity Date

8/1/22 Bonds Payable 1,000,000

Interest Expense 50,000

Discount on Bonds Payable 70,000

Cash 980,000

Retirement on February 1, 2020 at 92

Amortization of bond discount:

70,000/4 = 17, 500 annual amortization

Interest Expense (17,500/2) 8,750

Discount on Bonds Payable 8,750

8/1/18 70,000

8/1/18 – 2/1/20 [(18months/48) * 70,000] (26,250 )

Balance , 2/1/20 43,750

Cash payment:

Retirement Price 920,000

Accrued interest

(1M x 10% x 3/12 = 25,000) 25,000

Total Cash payment 945,000

Carrying Amount:

Bonds Payable 1,000,000

Discount on Bonds Payable ( 43,750)

Carrying Amount, 2/1/20 956,250

2/1/20 Bonds Payable 1,000,000

Interest Expense 25,000

Loss on Early retirement of bonds

Cash 945,000

Discount on Bonds Payable 43,750

Gain on early retirement of bonds 36,250

TREASURY BONDS

- Entity’s own bonds originally issued and reacquired but not cancelled

Illustration:

A 1M bond was originally issued at 105, subsequently,the entity reacquired 500,000 face
amount at 102. At reacquisition, unamortized premium balance is 45,000 and accrued interest is 4,000.
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Acquisition:

Face amount 500,000

Premium (500,000/1M * 45,000) 22,500

Carrying Amount 522,500

Reacquisition price (500,000 * 102) (510,000)

Gain on reacquisition 12,500

Reacquisition price 510,000

Accrued Interest 45,000

Cash Payment 555,000

Entry:

Treasury Bonds 500,000

Premium on Bonds Payable 22,500

Interest Expense 45,000

Cash 555,000

Gain on acquisition of TB 12,500

Subsequent sale at 102:

Cash 510,000

Treasury Bonds 500,000

Premium on Bonds Payable 10,000

Subsequent sale at 98:

Cash 490,000

Discount on Bonds Payable 10,000

Treasury Bonds 500,000

BOND REFUNDING/REFINANCING

1. Issuance of new 4-yr 10% with 1M face amount at 1,100,000

2. Refunding of old 10% bonds with remaining life of 2 years at 104

Bonds Payable-old 1,000,000

Discount on Bonds Payable 10, 000

Retirement price (1M * 1.04) 1,040,000

Entry:

1. Cash 1,100,000

Bonds Payable 1,000,000

Premium on Bonds Payable 100,000

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2. Bonds Payable 1,000,000

Loss on Extinguishment of bonds 50,000

Cash 1,040,000

Discount on Bonds Payable 10,000

FAIR VALUE OPTION

- No amortization
- Any transaction/bond issue cost are expensed outright
- Interest Expense is recognized using the stated/nominal rate

Illustration:

On January 1, 2018, an entity issued a 12% bond amounting to 1M at 103 to yield 10%. Interest
is payable annually on December 31. The entity paid bond issue cost of 50,000. On December 31, 2018,
the fair value of the bonds is decreased by 80,000.

ENTRY:

1/1/18 Cash 1,030,000

Bonds Payable 1,030,000

Transaction Cost 50,000

Cash 50,000

12/31/18 Interest Expense 120,000

Cash 120,000

Bonds Payable 80,000

Gain from change in FV 80,000

Suppose that on December 31, 2018, the fair value of the bonds is increased by 100,000; 80,000 is
attributable to increase in the market interest rate, the remaining is attributable to credit risk.

12/31/18 Loss on credit risk-OCI 20,000

Loss from change in FV 80,000

Bonds Payable 100,000

Note: Credit risk does not include market risks: interest, currency and price risk.
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AMORTIZATION OF BOND DISCOUNT OR PREMIUM

1. Straight Line

Amortization = Bond Discount or Premium/Life of the bonds

2. Bond Outstanding Method (serial bonds)

Illustration 1:

On January 1, 2018, an entity issues a 10% bond with a face amount of 1M at 102 that
pays 200,000 yearly for five years.

Table of amortization

Year Bond Outstanding Fraction Premium Amortization

2018 1,000,000.00 1000/3000 6,666.00
2019 800,000.00 800/3000 5,333.00
2020 600,000.00 600/3000 4,000.00
2021 400,000.00 400/3000 2,666.00
2022 200,000.00 200/3000 1,333.00
3,000,000.00 20,000.00

Illustration 2:

3. Effective interest method – required by the standard