INTERMEDIATE ACCOUNTING 2 OTHER TYPES OF BONDS

• Convertible bonds are bonds that can be exchanged

BONDS PAYABLE for shares of the issuing entity.
• Whenever funds being borrowed can be obtained • Callable bonds are bonds which may be called in for
from a small number of sources, mortgages or notes redemption prior to the maturity date.
are usually used. However, when large amounts are • Guaranteed bonds are bonds issued whenever
needed, an entity may have to borrow from the general another party promises to make payment if the
investing public through the use of a bond issue. borrower fails to do so.
• Bonds are used primarily by corporations and • Junk bonds are high-risk, high-yield bonds issued by
government units. the entities that are highly indebted or otherwise in
A bond is a formal unconditional promise made under weak financial conditions.
seal, to pay a specified sum of money at a determinable • Zero-coupon bonds are bonds that pay no interest,
future date, and to make periodic interest payment at a but the bonds offer a return in the form of a huge
stated rate until the principal is paid. discount from the face amount.
In simple language, a bond is a contract of debt
whereby one party called the issuer borrows funds FEATURES OF A BOND ISSUE
from another party called the investor. A bond indenture or deed of trust is the document
which shows in detail the terms of the loan and the
TERM AND SERIAL BONDS rights and duties of the borrower and other parties to
Term bonds are bonds with a single date of maturity. It the contract.
ay require the issuing entity to retire the bond issue at
one time. Bond certificates are used. Each bond certificate
Serial bonds are bonds with a series of maturity dates represents a portion of the total loan. The usual
instead of a single one. Serial bonds allow the issuing minimum denomination in business practice is P1,000,
entity to retire bonds by installment. although smaller denominations may be issued
occasionally.
SECURED AND UNSECURED BONDS
Mortgage bonds are bonds secured by mortgage on If property is pledged as security for the loan, a trustee
real properties. is named to hold title to the property serving as
Collateral trust bonds are bonds secured by shares security. The trustee acts as the representative of the
and bonds of other corporations. bondholders and is usually a bank or trust entity.
Debenture bonds are unsecured or bonds without
collaterals. A bank or trust entity is usually appointed as registrar
or disbursing agent. The borrower deposits interest and
REGISTERED AND BEARER BONDS principal payments with the disbursing agent, who then
• Registered bonds require the registration of the name distributes the funds to the bondholder.
on the bondholders on the books of the corporation.
BOND INDENTURE
• If the bondholder sells a bond, the old bond The bond indenture is the contract between the
certificate is surrendered to the entity and a new bond bondholders and the borrower or issuing
certificate is issued to the buyer. entity.

• Coupon or bearer bonds are unregistered bonds in CONTENTS OF BOND INDENTURE

the sense that the name of the bondholder is not • Characteristics of the bonds
recorded on the entity’s books. • Maturity date and promotion for repayment
• Period of grace allowed to issuing entity
• Establishment of a sinking fund and the periodic
deposit therein
• Deposit to cover interest payments SUBSEQUENT MEASUREMENT
• Provisions affecting mortgaged property, such as • PFRS 9, paragraph 5.3.1, provides that after initial
taxes, insurance coverage, collection of interest or recognition, bonds payable shall be measured either:
dividends on collaterals • A. At amortized cost, using the effective interest
• Access to corporate books and records of trustee method
• Certification of bonds by trustee • B. At fair value through profit or loss
• Required debt to equity ratio
• Minimum working capital requirement to be AMORTIZED COST OF BONDS PAYABLE
maintained • The amortized cost of bonds payable is the amount at
which the bond liability is measured initially minus
SALE OR ISSUANCE OF BONDS PAYABLE principal repayment, plus or minus the cumulative
• The bonds needed for the issuance of bonds are amortization using the effective interest method of any
usually too large for one buyer to pay. Thus, very often difference between the face amount and present value
the bonds are divided into various denomination of sale of the bonds payable.
P100, P1,000, P10,000, thus enabling more than one
buyer or investor to purchase the bond. • Actually, the difference between the face amount
• Quite often, instead of selling bonds of various and present value is either discount or premium on
denomination the bonds are sold in equal bonds payable.
denominations of say P1,000 only. The P1,000
denomination is called the face amount of the bonds. ACCOUNTING FOR ISSUANCE OF BONDS PAYABLE
Each bond is evidence by a certificate called a bond • There are two approaches in accounting for the
certificate. authorization and issuance of bonds, namely:
• Thus, if bond with face amount of fifty million • A. Memorandum Approach
(P50,000,000) are sold divided into P1,000 • B. Journal Entry Approach
denomination, there shall be fifty thousand (P50,000)
bond certificates containing a face amount of P1,000. ILLUSTRATION
• When an entity sell a bond issue it undertakes to pay On January 01, 2021, an entity is authorized to issue 10-
the face amount of the bond issue on maturity date and year, 12% bonds with face amount of five million
the periodic interest. (P5,000,000), interest payable January 1 and July 1,
• Interest is usually payable semi-annually or every six consisting of 5,000 units of P1,000 face amount. The
(6) months. Of course, there are certain bonds that pay bonds are sold at face amount to an underwriter
interest annually or at the end of every bond year.
MEMORANDUM APPROACH
INITIAL MEASUREMENT • The following memorandum entry is made in the
• PFRS 9, paragraph 5.1.1 provides that bonds general journal and a notation of the amount
payable not designated at fair value through profit or authorized:
loss shall be measured initially at fair value minus • On January 1, 2021, the entity is authorized to issue
transaction cost that are directly attributable to the P5,000,000 face amount, 10-year 12% bonds, interest
issue of bond payable payable January 1 and July, consisting of 5,000 units of
• The fair value of the bonds payable is equal to the P1,000 face amount.
present value of future cash payment to settle the bond
liability. • To record the issuance of the bonds at face amount:
• Bond issue cost shall be deducted from the fair value Cash 5,000,000
or issue price of the bonds payable in measuring initially Bonds Payable 5,000,000
the bonds payable. However, if the bonds are
designated and accounted for at fair value through • In the succeeding discussions, the memorandum
profit or loss, the bond issue costs are treated as approach of accounting for bonds will be employed, as
expense immediately. this is the one generally followed.
JOURNAL ENTRY APPROACH record the amortization of the premium on bonds
payable is:
• To record the authorization of the bonds: Premium on bonds payable 25,000
Unissued bonds payable 5,000,0000 Interest Expense 25,000
Authorized bonds payable 5,000,000
ISSUANCE OF BONDS PAYABLE AT A DISCOUNT
• To record the issuance of the bonds at face amount: If the issue price of the bonds payable is less than the
Cash 5,000,000 face amount, the bonds are said to be sold at a
Bonds Payable 5,000,000 discount.

ISSUANCE OF BONDS PAYABLE AT A PREMIUM For example, an entity issued bonds payable with face
• If the issue price is more than the face of the bonds amount of P5,000,000 at 95.
amount of the bonds payable, the bonds are said to be
sold at a premium. Journal entry:
• For example, an entity issued bonds payable with face Cash 4,750,000
amount of P5,000,000 at 105. The quoted price of 105 Discount on bonds payable 250,000
means 105% of the face amount of the bonds. Bonds payable 5,000,000
• Thus, the issue price is P5,250,000, computed by
multiplying 105% by P5,000,000 The discount on bonds payable is in effect a loss to the
• The journal entry would be: issuing entity. However, the discount on bonds payable
Cash 5,250,000 is not treated as an outright loss.
Bonds Payable 5,000,000
Premium on BP 250,000 When bonds are sold at a discount, it means that the
buyer or investor is not willing to accept simply the
• The premium on bonds payable is in effect a gain on nominal rate of interest.
the part of the issuing entity because it receives more
than what it is obligated to pay under the terms of the Thus, when the bonds are issued at a discount, the
bond issue. effective rate is higher than the nominal rate.
• The obligation of the issuing entity is limited only to Accounting-wise, the discount on bonds payable is
the face amount of the bonds payable. amortized as a loss over the life of the bonds payable
• The premium on bonds payable however is not and charged to interest expense.
reported as an outright gain. When the bonds are sold
at a premium, it means that the investor or the buyer is If the bonds have a life of 10 years and the straight-line
amenable to receive interest that is somewhat less method is used, the journal entry to record the
than the nominal or stated rate of interest. amortization of the discount on bonds payable is:
• Thus, in such a case, the effective rate is less than the
nominal rate of interest. Interest expense 25,000
Discount on bonds payable 25,000
• The nominal rate of interest is the rate appearing on
the bond certificate. It is that interest which the issuing PRESENTATION OF BOND DISCOUNT AND
entity periodically pays to the buyer or bondholder. PREMIUM
• Because of the relationship of the premium to the Discount on bonds payable and premium on bonds
interest, the premium on bonds payable is amortized payable are reported as adjustments to the bond
over the life of the bonds payable and credited to liability account.
interest expense.
The discount on bonds payable is a deduction from the
Accordingly, if the bonds have a 10 year life and the bonds payable and premium on bonds payable is an
straight line method is used for simplicity, the entry to addition to the bonds payable.
The discount on bonds payable and the premium on
bonds payable shall not be considered separate from
the bonds payable. Both accounts shall be treated
consistently as valuation accounts of the bond liability.

The amortization of the discount on bonds payable or

premium on bonds payable may be on every interest
date or at the end of every year.