Noncurrent Liabilities - Chapters 5-9

BSA-3103
GRO U P 2 :
NON-CURRENT
LIABILITIES
BSA-3103
C H APTER 5 :
BONDS
PAYABLE
Ca n ta l , Tr i c ia M.
BONDS PAYABLE
BOND
- 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
- evidenced by certificate and contractual agreement
that contained a document known as “bond
indenture”.
B O N D S PA Y A B L E
TERM AND SERIAL
BONDS
Term Bonds
- bonds with a single date of maturity.
Serial Bonds
- bonds with a series of maturity dates instead of a
single one.
SECURED AND
UNSECURED
BONDS
Mortgage Bonds
- bonds secured by a mortgage on real properties.
Collateral Trust
- bonds secured by shares and bonds of other
corporation
SECURED AND
UNSECURED
BONDS
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.
Coupon or Bearer Bonds

- unregistered bonds in the sense that the name of
the bondholder is not recorded on the entity books.
OTHER TYPES OF
BONDS
Convertible Bonds
- bonds that can be exchanged for shares of the
issuing entity.
Callable Bonds
- bonds which may be called in for redemption prior
to the maturity date.
OTHER TYPES OF
BONDS
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.
OTHER TYPES OF
BONDS
Zero-Coupon Bonds
-bonds to pay no interest but the bonds offer a return
in the form of “deep discount” or huge discount from
the face amount.
FEATURES OF BOND
ISSUE
• Bond Indenture or Deed of Trust
• Bond Certificate
• Trustee
• Registrar or Disbursing Agent
CONTENTS OF
BONDS INDENTURE
Bond Indenture
- contract between the bondholders and the borrower
or issuing entity.
CONTENTS OF
BONDS INDENTURE
Bond Indenture contains the following items:
a. Characteristics of bonds
b. Maturity date and provision for
repayment
c. Period of grace allowed to issuing entity
d. Establishment of a sinking fund at the
periodic deposit therein.
e. Deposit to cover interest payments
CONTENTS OF
BONDS INDENTURE
Bond Indenture contains the following items:
f. Provisions affecting mortgaged property
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
• If bonds with face amount of P50,000,000 are sold,

divided into P1,000 denomination, there shall be
50,000 bond certificates containing a face amount of
P1,000.
P50,000,000 / P1,000= 50,000
SALE OF BONDS
• When an entity sells bonds issues, it undertakes to

pay the face amount of the bond issue on maturity
date and periodic interest.
• Interest is usually payable semiannually.
• There are certain bonds that pay interest annually.
INITIAL
MEASUREMENT OF
BONDS PAYABLE
PFRS 9, paragraph 5.1.1, provides that bonds payable
not designated at fair value 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.
SUBSEQUENT
MEASUREMENT OF BONDS
PAYABLE
PFRS 9, paragraph 5.3.1, provides that after initial
recognition, bonds payable shall be measured either:
a. At amortized cost, using the effective
interest method
b. 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.
ACCOUNTING FOR
ISSUANCE OF
BONDS
• Memorandum Approach
• Journal Entry Approach
ILLUSTRATION:
On January 1,2020, an entity is authorized to issue 10-

year, 12% bonds with face amount of P5,000,000,
interest payable January 1 and July 1, consisting of
P5,000 units of P1,000 face amount. The bonds are
sold at face amount to an underwriter.
MEMORANDUM
APPROACH
To record the sale of the bonds at face amount:
Cash P5,000,000
Bonds Payable P5,000,000
JOURNAL ENTRY
APPROACH
To record the authorization of the bonds:
Unissued bonds payable P5,000,000
Authorized bonds payable P5,000,000
To record the sale of bonds at face amount:

Cash P5,000,000
Unissued bonds payable P5,000,000
ISSUANCE OF
BONDS AT A
PREMIUM
Sales price > Face amount of bonds
Example:
An entity issued bonds with face amount of
P5,000,000 at 105. The quoted price of 105 means
“105% of face amount of the bonds.” Thus the sales
price is P5,250,000 (P5,000,000 x 105%).
JOURNAL ENTRY
Cash P5,250,000
Premium on Bonds Payable P250,000
Entry record the amortization of the bond premium:

Premium on Bonds Payable P25,000
Interest Expense (250,000/10) P25,000
ISSUANCE OF
BONDS AT A
DISCOUNT
Sales price < Face amount of bonds
Example:
An entity issued bonds with face amount of
P5,000,000 at 95.
Cash (5,000,000 x 95%) P4,750,000

Discount on bonds payable 250,000
ISSUANCE OF
BONDS AT A
DISCOUNT
Entry to record the amortization of the bond discount
is:
Interest Expense (250,000/10yrs) P25,000

Discount on bonds payable P25,000
PRESENTATION OF
DISCOUNT AND
PREMIUM
The discount on bond payable is a deduction from the
bond payable and the premium on bond payable is an
addition to the bond payable.
PRESENTATION OF
BONDS PAYABLE IN
SFP
B O N D S PA YA B L E
BOND ISSUE COSTS
Are transaction costs directly attributable to the issue

of bonds payable.
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
bonds payable.
RECORDING
INTEREST ON
BONDS
• Payment of interest during the year
• Accrual of interest at the end of the year
ILLUSTRATION
On March 1, 2020, an entity sold bonds with face

amount of P5,000,000 and 12% interest payable
semiannually on March 1 and September 1.
Inasmuch as the bonds are sold on March 1, 2020, the

first payment of interest will be on September 1, 2020.
JOURNAL ENTRIES
2020
Sept. 1 Interest Expense P300,000
Cash P300,000
Semiannual interest payment
(P5,000,000 x 12% x ½= P300,000)
Dec. 31 Interest Expense P200,000
Accrued Interest Payable P200,000
Interest accrued for 4months from Sept 1 to Dec 31,
2020
(P5,000,000 x 12% x 4/12= P200,000)
TITLE
2021
Jan 1 Accrued Interest Payable P200,000
Interest Expense P200,000
Mar 1 Interest Expense P300,000
Cash P300,000
Sept 1 Interest Expense P300,000
Cash P300,000
Dec 31 Interest Expense P200,000
ISSUANCE OF
BONDS ON
INTEREST DATE
On June 1, 2020, an entity issued bonds with face
amount of P5,000,000 at 97.
The bonds mature in 5 yrs. And pay 12% interest
semiannually on June 1 and Dec. 31.
JOURNAL ENTRIES
2020
June 1 Cash (P5,000,000 x 97%) P4,850,000
Discount on Bonds Payable 150,000

Cash P300,000
Semiannual interest payment
JOURNAL ENTRIES
2020
Interest accrued for one month from Dec. 1 to Dec. 31,
2020 (5,000,000 x 12% x 1/12= P50,000)

Amortization of bond discount from June 1 to Dec. 31.
(P150,000 / 5yrs= P30,000 annual amortization, x 7/12=
P17,500)
JOURNAL ENTRIES
2021
Jan 1. Accrued Interest Payable P50,000
June 1 Interest Expense P300,000

Cash P300,000

Cash P300,000
JOURNAL ENTRIES
2021
Interest accrued for one month

Amortization of bond discount for one year, 2021
Discount on bonds payable (102,500)*
Carrying Amount P4,897,500
*Discount on bonds payable

June 1, 2020 150,000
Dec. 31, 2020(17,500)
Dec. 31, 2021(30,000)
P102,500
ISSUANCE OF BONDS
BETWEEN INTEREST
DATES
On April 1,2020, an entity issued bonds with face amount of
P5,000,000 at P5,228,000 plus accrued interest.
The bonds are dated January 1, 2020, mature in 5 yrs and pay 12%
interest semiannually on January 1 to July 1.
To record the issue of the bonds on April 1, 2020

Cash P5,378,000
Premium on bonds payable 228,000
Interest Expense 150,000
ISSUANCE OF BONDS
BETWEEN INTEREST
DATES
Issue price P5,228,000
Add: Accrued interest from Jan 1
to Apr 1,2020
(5,000,000 x 12% x 3/12) 150,000
P5,378,000
ISSUANCE OF BONDS
BETWEEN INTEREST
DATES
• If bonds are issued between interest dates, an
accrued interest is involved and paid by the buyer or
investor.
• The accrued interest “sold” is credited to interest
expense.
• On July 1, 2020, the journal entry to record the
payment of semiannual interest is:
Interest Expense (5,000,000 x12%x ½) P300,000

Cash P300,000
ANOTHER APPROACH
FOR THE INTEREST
ACCRUED
Cash P5,378,000
Accrued interest payable 150,000
Payment of first semiannual interest

Accrued interest payable P150,000
Cash P300,000
ADJUSTING
ENTRIES- DEC.
31,2020
Accrued Interest Expense P300,000
Premium on bonds payable P36,000

ADJUSTING
ENTRIES- DEC.
31,2020
Original life of bonds (5yrs x 12) 60 months
Less: Expired life on the date of sale
(Jan 1 to Apr 1) 3 months
Remaining life of bonds 57 months
Monthly amortization (228,000x57months) P4,000
Amortization for 9 months from Apr 1 to

Dec 31, 2020 (4,000x9) P36,000
FINANCIAL STATEMENT
PRESENTATION
Bonds Payable, due January 1, 2025 P5,000,000
Carrying amount P5,192,000
BOND RETIREMENT
ON MATURITY
DATE
To make bond issue more attractive, an entity may
agree in the bond indenture to establish a sinking fund
exclusively for use in retiring the bonds at maturity.
ILLUSTRATION
An entity sold bonds with face amount of P5,000,000 on March

1, 2020 with 12% interest payable March 1 and September 1 and
the bonds mature on March 1, 2025.
March 1, 2025
Sinking Fund P5,300,000
If sinking fund is not used, the payment of bonds will
come from the general cash of the issuing entity.

Cash P5,300,000
BOND RETIREMENT
PRIOR TO MATURITY
DATE
When bonds are reacquired prior to maturity date, they
may be canceled and permanently retired, or held in the
treasury for future reissue when the need for funds
arises.
If the reacquired of bonds are canceled and
permanently retired, the following procedures are
followed:
1. The bond premium or bond discount should be

amortized
up to the date of retirement.
ILLUSTRATION
On March 1, 2020, bonds with face amount of

P5,000,000 are issued for P4,730,000.
The bonds are dated March 1, 2020 and mature in 5 yrs,
and pay 12% interest semiannually on March 1 and
September 1.
The straight line method of amortization is used for
simplicity.
All the bonds are retired on July 1,2023 at 97.
BOND RETIREMENT
PRIOR TO MATURITY
DATE
Discount on bond payable P27,000
(270,000/5yrs= 54,000 annual amortization)

(54,000x ½ = 27,000)
BOND RETIREMENT PRIOR
TO MATURITY DATE
2. The balance of the bond premium or bond discount should be
determined. This balance is important because the amount related to
the bonds retired is canceled.
Discount on bonds payable- March 1, 2020 P270,000

Less: Amortization from Mar 1, 2020 to
July 1 2023 or 40 months
(40/60 x 270,000) 180,000
Balance, July 1, 2023 P90,000
TO MATURITY DATE
3. The accrued interest to date of retirement should be
determined.
July 1, 2023
P5,000,000 x 12% x 4/12= P200,000
TO MATURITY DATE
4. The total cash payment should be computed.
Retirement price (P5,000,000 x 97) P4,850,000

Add: Accrued Interest 200,000
Total Cash Payment P5,050,000
BOND RETIREMENT
PRIOR TO MATURITY
DATE
5. The carrying amount of the bonds retired is
determined.

Discount on bonds payable (90,000)
Carrying amount on July 1, 2023 P4,910,000
BOND RETIREMENT
PRIOR TO MATURITY
DATE
6. The gain or loss on the retirement of the bonds is
computed.
Retirement Price > Carrying amount Loss
Retirement Price < Carrying amount Gain
Carrying amount of bonds payable P4,910,000

Less: Retirement price P4,850,000
Gain on early retirement P60,000
BOND RETIREMENT
PRIOR TO MATURITY
DATE
7. The retirement of bonds is then recorded by canceling the
bond liability together with the unamortized premium or
discount. Any accrued interest is debited to interest
expense.
To record the retirement of bonds on July 1, 2023
Cash P5,050,000
Gain on early retirement of bonds 60,000
BSA-3103
C H APTER 5 :
BONDS
PAYABLE
Ba r te, Kr i st in e Mari el le L.
QUERY:
Suppose in the preceding illustration, not all the bonds

are retired on July 1, 2023?
Suppose only bonds with face amount of

P1,000,000 are retired at 97?
The same procedures discussed previously are followed.
Thus the amortization of the discount is updated on July 1, 2023.
Interest expense 27,000

On July 1, 2023, after recording the discount amortization, the

discount on bonds payable will have an adjusted debit balance
of P90,000.
a. Total cash payment
Retirement price (1,000,000x97)

Add: Accrued interest on P1,000,000
from March 1 to July 1, 2023
(1,000,000x 12 x 4/12)
Total cash payment
b. Carrying amount of bonds retired and gain on retirement

Bonds payable retired 1,000,000
Discount on bonds payable applicable to the
bonds retired (1,000,000 / 5,000,000 x 90,000 ( 18,000)
Carrying amount – July 1, 2023 982,000
Less: Retirement price 970,000
Gain on early retirement on bonds P 12,000
Journal entries:
Bonds payable 1,000,000
Cash 1,010,000
Remaining journal entries for 2023

Sept. 1. Interest expense 240,000
Cash 240,000
(P4,000,000 x 12% x ½)
Dec. 31. Interest expense 160,000

Accrued interest payables 160,000
(P4,000,000 x 12% x 4/12)

amortization of bonds discount for 6 months
TREASURY BONDS
• These are an entity’s own bonds originally issued and reacquired but
not cancelled, wherein its acquisition calls for the same accounting
procedures accorded to a formal retirement of bond prior to the
maturity date.
• Treasury bonds should be debited at face amount at face amount
• The difference between the acquisition cost and the carrying amount
of the treasury bonds is treated as gain or loss on the acquisition of
the treasury bonds.
ILLUSTRATION
An entity originally issued bonds with the face amount

of
P5,000,000 at 105 or a premium of P250,000.
Subsequently, the entity reacquired P1,000,000 face

amount to be placed in the treasury at 103.
At the time of the reacquisition, the unamortized

premium balance
is P200,000, and accrued interest on the treasury
bonds is P30,000 which is paid in cash.
Face amount of the treasury bonds P1,000,000
Applicable premium (1,000,000 / 5,000,000 x 200,000) 40,000
Carrying amount 1,040,000
Less: Reacquisition price (P1,000,000 x 103%) 1,030,000
Gain on acquisition of treasury bonds P10,000
Reacquisition price P1,030,000

Accrued interest on the bonds 30,000
Treasury bonds 1,000,000

Cash 1,060,000
Gain on acquisition of treasury bonds 12,000
Reissuance at a premium
The treasury bonds are reissued for P1,200,000.
Cash 1,200,000
Reissuance at a discount
The treasury bonds are reissued for P900,000.
Cash 900,000
* The treasury bonds when not subsequently sold are simply

cancelled against bonds payable accounts.
STATEMENT OF
PRESENTATION
Bonds payable P5,000,000
Treasury bonds (1,000,000)
Bonds payable issued and outstanding 4,000,000
BOND REFUNDING
• It is the floating of the new bonds the proceeds from which are
used in paying the original bonds.
• Also known as bond refinancing, is a premature retirement of the

of the old bonds by means of issuing new bonds.
• When refunding is made on date of acquisition of old bonds, no

accounting problem arises, and no unamortized premium or
discount involved
BOND REFUNDING
• When refunding is made prior to the maturity date of the old

bonds, consideration must be given to the refunding charges
pertaining to the old bonds
• The difference between the carrying amount of the financial

liability extinguished and the consideration paid shall be
included in profit or loss
ILLUSTRATION
1. Issuance of new 10-year 10 % bonds,with the face amount of
P1,500,000 for P1,600,000.
2. Refunding of old 12% bonds,with remaining life of 4years, at 102
Bonds payable-old 1,000,000

Discounts of bonds payable 30,000
Retirement price (1,000,000x102) 1,020,000
JOURNAL ENTRIES:
1. To record the issuance of the new bonds payable:
Cash 1,600,000
2. To record the retirement of the old bods payable:

Loss on extinguishment of bonds 50,000
Cash 1,020,000
The loss on extinguishment of bonds is represented by the
refunding charges of P50,000.
Unamortized discount 30,000

Redemption premium(1,000,000x2%) 20,000
Total refunding charges 50,000
Or

Discount of bonds payable (30,000)
Carrying amount 970,000
Less: retirement price 1,020,000
Loss on extinguishment (50,000)
AMORTIZATON OF BOND
DISCOUNT OR PREMIUM
There are three approaches in amortizing bond premium or bond
discount, namely:
a. Straight line
b. Bond outstanding method
c. Effective interest method or simply “interest method” or
scientific method
PFRS 9 requires the use of the effective interest method in

amortizing discount, premium and bond issue cost.
STRAIGHT LINE METHOD
• The straight line method provides for an equal amortization of

the bond premium or bond discount.
• The procedure is simply to divide the amount of the bond
premium or bond discount by the life of the bonds to arrive at
the periodic amortization.
• The life of the bonds is that period commencing of the date of
sale of the bonds up to the maturity date.
BOND
OUTSTANDING
METHOD
• The bond outstanding method is applicable to serial bonds
whether issued at discount or premium.
• The bond outstanding amortization approach gives

recognition to the diminishing balance of the bonds.
• It is based on the theory that interest expense shall decrease

every year by reason of the decreasing principal bond liability.
PREMATURE
RETIREMENT OF SERIAL
BONDS
• When serial bonds are paid on the regular maturity dates, no
accounting problem arises because no unamortized discount or
premium is related to such serial bonds retired.
• The problem occurs when the serial bonds are retired prior to their
scheduled maturity dates.
• In this case, the retirements calls for the cancellation of any

unamortized discount or premium related to the serial bonds
retired.
ILLUSTRATION
Using the preceding illustration assume serial bonds

with face
amount of P1,000,000 scheduled to be retired on
December 31,
2022, are retired at 103 on December 31, 2020,two
years prior to their redemption date.
The following procedures may be followed in

determining the unamortized premium or discount
related to the prematurely retired serial bonds:
ACCOUNTING
PROCEDURES
Get the ratio of the total premium or discount to the
common denominator of the fractions developed, total
of bond outstanding column. This ratio represents the
amortization rate per year.
300,000/15,000,000 =.02 rate per year
ACCOUNTING
PROCEDURES
2. Multiply the rate computed in (1) by the face amount of the bonds
retired. The answer gives the unamortized premium or discount per
year related to the bonds retired.
P1,000,000 x .02 = P20,000 unamortized premium per year
ACCOUNTING
PROCEDURES
3. Multiply the unamortized premium or discount per year
computed in (2) by the period from date of retirement to
the scheduled maturity date of the retirement bonds.
The answer is the unamortized premium or discount applicable to

the bonds returned which should be canceled.
P20,000 x 2 years = P40,000

unamortized premium related to the P1,000,000 face value bonds retired
ACCOUNTING
PROCEDURES
Journal entry to record the retirement of the P1,000,000 face amount
serial bonds on December 31, 2020:
Bond payable 1,000,000

Cash (1,000,000x103) 1,030,000
ILLUSTRATION –
Accounting year and bond year
do coincide
Issue price 4,700,000
Date of issue April 1, 2020
Date of bonds April 1, 2020
Interest rate 12%
Semiannual interest payment dates April 1 and October 1
The bonds mature on April 1 of the year at the rate of P1,000,000
JOURNAL ENTRIES:
2020
April 1 Cash 4,700,000
Oct 1. Interest expense 300,000

Cash 300,000
Semiannual interest payment (5,000,000x12%x1/2)
Dec 31. Interest expense 150,000

Dec 31. Interest expense 75,000

Amortization of discount for 2020
JOURNAL ENTRIES:
2021
Jan 1. Accrued interest payable 150,000
Reversing entry
Apr. 1. Interest expense 300,000

Cash 1,300,000
Semiannual interest payment and
payment of the first series of the bonds
Oct. 1. Interest expense 240,000

Cash 240,000
Semiannual interest (4,000,000x12%x1/2)
Interest accrued for 3 months
(4,000,000x12%x3/12)
31. Interest expense 85,000

Amortization of discount for 2021

FACE VALUE OPTION OF
MEASURING BONDS
PAYABLE
PFRS 9, par. 4.2.2 provides that at initial recognition, bonds
payable maybe irrevocably designated as at fair value through profit
of loss
Under the fair value option, the bonds payable shall be measured
initially at fair value and remeasured at every year-end with any
changes in fair value generally recognized in profit or loss.
There is no amortization of bond discount and bond premium. Any

transaction cost or bond issue cost should be expensed
immediately
ILLUSTRATION
On January 1, 2020, an entity issued bonds with face amount of

P5,000,000 and 12% stated interest rate for P5,379,100. The
bonds are sold to yield 10%. Interest is payable annually on
December 31.
The entity paid bond issue cost of P100,000. On December 31,

2020, the fair value of the bonds is determined to be P5,300,000.
The entity elected the fair value option in measuring the bonds
payable.
JOURNAL ENTRIES:
2020
Jan 1 Cash 5,379,100
Transaction Cost 100,000
Cash 100,000

Cash (5,000,000x12%) 600,000
Bonds payable 79,100

Gain from change in fair value 79,100

Bonds payable Jan 1 5,379,000
Fair value Dec 31 5,300,000
Decrease in FV from BP 79,100
CHANGE IN FAIR VALUE
RECOGNIZED IN OCI
PFRS 9, par. 5.7.7 provides that the gain or loss on financial liability
designated at fair value through profit or loss shall be accounted for
as follows:
a. A change in fair value attributable to the credit risk of the liability

is recognized in other comprehensive income.
Credit risk is the risk that the issuer of the liability would cause
of financial loss to the other party by failing to discharge the
obligation.
CHANGE IN FAIR
VALUE RECOGNIZED
IN OCI
Credit risk does not include market risk such as interest risk,
currency risk, and price risk.
b. The remaining amount of the change in fair value is recognized in profit or

loss.
However, par. 5.7.8 provides that if presenting the change in fair value
attributable to credit risk would create or enlarge an accounting mismatch,
all gains and losses, including the effects of change in credit risk are
recognized in profit or loss.
CHANGE IN FAIR
VALUE RECOGNIZED
IN OCI
Application guidance 5.7.9 provides that amounts recognized
in other comprehensive income resulting from changes in fair
value
of credit risk of a financial liability designated at fair value
through profit or loss shall not be subsequently transferred to
profit and loss.
However the cumulative gain or loss recognized maybe

transferred within equity or retained earnings
ILLUSTRATION
On January 1, 2020, an entity issued bonds payable with

the face amount of P5,000,000 and 10% stated interest rate for
P4,800,000.
The bonds have a 5-year-term and interest is payable annually

every December 31.
The entity elected the fair value option in measuring the bonds
payable.
On December 31, 2020, the fair value of the bonds is P5,500,000.
JOURNAL ENTRIES:
2020
Jan 1 Cash 4,800,000

Cash (5,000,000x10%) 500,000
31. Loss on credit risk – OIC 200,000

Loss from change in FV 500,000
Bonds payable 700,000
The loss on credit risk is presented as component of the other comprehensive income
The loss from change in fair value is recognized in profit or loss
BSA-3103
C H APTER 6 :
EFFECTIVE
INTEREST
METHOD
Cel o ri co , Aran J as per C.
PFRS 9
• This requires that discount on bonds payable,premium

on bonds payable and bond issue cost shall be
amortized using the effective interest method.
EFFECTIVE INTEREST METHOD

EFFECTIVE
INTEREST METHOD
• It is also known as scientific method or simply “interest
method”.
• It distinguishes two kinds of interest rate: nominal and

effective
i. Nominal Rate- coupon or stated rate
ii. Effective Rate- yield or market rate

• Effective Rate exactly discounts estimated cash future
payments through expected life of the bonds payable or
when appropriate, a shorter period of net carrying
amount of the bonds payable.
• Bonds sold at face amount- effective and nominal rate

are the same.

• Bonds sold at discount or premium- effective and
nominal rate differs.
• Bonds sold at premium- effective rate is lower than

nominal rate.
• Bonds sold at a discount- effective rate is higher than

nominal rate

• Effective interest expense:
effective rate x carrying amount of the bonds
• Premium Amortization:
Nominal interest(nominal rate x face amount) xx
Less: Effective interest xx
Premium Amortization xx

EFFECTIVE
AMORTIZATION OF
DISCOUNT
• On January 1, 2020, an entity issued two-year 8% bonds with
face amount of ₱1,000,000 for ₱964,540, a price which will
yield a 10% effective interest cost per year. Interest is
payable semi-annually on June 30 and December 31.

SCHEDULE OF
AMORTIZATION

EFFECTIVE
AMORTIZATION OF
DISCOUNT
• Interest Paid:
Face amount x Semi-annual nominal rate of 4% or
₱40,000
• Interest Expense:
Carrying amount x Semi-annual effective rate

• Discount Amortization:
Interest expense – Interest paid
• Carrying Amount:
Preceding carrying amount + Discount amortization

JOURNAL ENTRIES
FOR 2020
• Jan. 1 Cash ₱964,540
Bonds Payable ₱1,000,000
• Jun.30 Interest expense ₱ 48,227

Cash ₱ 40,000
• Dec. 31 Interest Expense ₱ 48,638

Cash ₱ 40,000
Bonds Payable 8,638

EFFECTIVE
AMORTIZATION OF
PREMIUM
• On January 1, 2020, an entity issued three-year 12% bonds with
face amount of ₱1,000,000 for ₱1,049,740, a price which will yield
a 10% effective interest cost per year. The interest is payable
annually every December 31.

SCHEDULE OF
AMORTIZATION

EFFECTIVE
AMORTIZATION OF
PREMIUM
• Interest Paid:
Face amount x Annual nominal rate of 12% or ₱120,000
• Interest Expense:
Carrying amount x Annual effective rate

• Premium Amortization:
Interest paid – Interest expense
• Carrying Amount:
Preceding carrying amount + Premium amortization

JOURNAL ENTRIES
FOR 2020
• Jan. 1 Cash ₱1,049,740
Bonds Payable ₱1,000,000
• Dec. 31 Interest expense ₱ 48,227

Cash ₱ 120,000

MARKET PRICE OR
ISSUE PRICE OF BOND
PAYABLE
• It is equal to the sum of the following:
a. Present value of bonds payable
b. Present value of the total interest payments

• Present value of the principal bond liability:
Face amount of the bond x Present value of 1
• Present Value of future interest payments:

Periodic nominal interest multiplied by the Present
value of an ordinary annuity of 1

• Illustration 1
Face amount of bonds ₱ 4,000,000
Nominal rate 6%
Effective rate 8%
• Bonds are issued on Jan. 1,2020 and mature in four

years. The interest is payable annually every Dec. 31.

COMPUTATION OF
PRESENT VALUE OF THE
BONDS
Present value of principal
(4,000,000 x .7350)
2,490,000
Present value of annual interest

Payments (240,000 x 3.3121) 794,904
Total present value 3,734,904
• Annual interest payment: (Face amount x Nominal rate)

Face Amount ₱4,000,000
Market price or issue price ( 3,734,904 )
Discount on bonds payable ₱ 265,096

SCHEDULE OF
AMORTIZATION

• Illustration 2
Face amount of bonds ₱ 5,000,000
Nominal rate 12%
Effective rate 10%
• Bonds are issued on Jan. 1,2020 and mature in three

years. The interest is payable semi-annually every Dec.
31.

COMPUTATION OF
PRESENT VALUE OF THE
BONDS
Present value of principal
(5,000,000 x .7462) 3,731,000
Present value of annual interest
Payments (300,000 x 5.0757) 1,552,710

Face amount ₱5,253,710
Market price or issue price ( 5,000,000 )

SCHEDULE OF
AMORTIZATION

PV FACTOR THROUGH
ORDINARY
The PV of 1 at 5% for 6 periods and the PV of an ordinary
CALCULATOR
annuity of 1 at 5% for 6 periods can be determined through
the use of an ordinary calculator.
Kindly get your calculator and try the following steps:

1. Enter 1.05
2. Press the division sign ( 4-) twice.

3. Press the equal sign (=) for the number of interest
periods required. Press once for one period, press twice
for two periods and so on. In this case, press 6 times
because there are 6 interest periods.
4. The result is the PV of 1 at 5% for 6 periods or .7462
5. Deduct 1.00 from the result in No. 4. The result is .2538

negative

6. Press the plus/minus sign (+/-) to remove the negative
in No. 5.
7. Divide the result in No. 6 by .05.
8. The result is the PV of an ordinary annuity of 1 at 5% for

6 periods or 5.0757.

ILLUSTRATION 3 -
SERIAL BONDS
Face amount of bonds ₱3,000,000
Nominal rate 12%
Effective rate 10%
Date of issue January 1,2020
Annual payment every December 31 ₱1,000,000
Interest is payable annually December 31

Present value of 1 at 10%
One period 0.9091
Two periods 0.8264
Three periods 0.7513

PRESENT VALUE OF
BONDS PAYABLE

Interest Payment
December 31,2020 (3,000,000 x 12%) ₱360,000
December 31,2021 (2,000,000 x 12%) 240,000
December 31,2022 (1,000,000 x 12%) 120,000

SCHEDULE OF
AMORTIZATION

December 31,2020
Interest paid (3,000,000 x 12%) ₱ 360,000

Interest expense (3,102,568 x 10%) 310,257
Premium amortization for 2020 ₱ 49,743

Carrying amount-January 1, 2020 ₱ 3,102,568
Premium amortization for 2020 ( 49,743 )
Principal payment on December 31,2020 ( 1,000,000 )
Carrying amount-December 31, 2020 ₱ 2,052,825

December 31,2021
Interest paid (2,000,000 x 12%) ₱ 240,000

Interest expense (2,052,825 x 10%) 205,282

Premium amortization for 2021 ( 34,718 )
Principal payment on December 31,2021 ( 1,000,000 )

December 31,2022
Interest paid (1,000,000 x 12%) ₱ 120,000

Interest expense 101,893*
* 10% x P1,018,107 equate P101,811. There is a difference of

₱ 82 due to rounding of present value factors.

JOURNAL ENTRIES
FOR 2020
1. Issuance of bonds:
Cash ₱ 3,102,568
Bonds payable ₱ 3,000,000
Premium bonds payable 102,568
2. Payment of interest:
Interest expense ₱ 360,000
Cash ₱ 360,000

3. Amortization of premium:
Premium bonds payable ₱ 49,743
4. Payment of principal:
Cash ₱ 1,000,000

EFFECTIVE INTEREST
METHOD – BOND ISSUE
• PFRS 9 provides that "transaction costs" that are directly
COST
attributable to the issue of a financial liability shall
be included in the initial measurement of the financial
liability.
• Transaction costs- defined as fees and commissions

paid to agents, advisers, brokers and dealers, levies by
regulatory agencies and securities exchange, and
transfer taxes and duties. Clearly, transaction costs
include bond issue costs.

• Bond issue costs will increase discount on bonds
payable and will decrease premium on bonds payable.
• Under the effective interest method, bond issue cost must

be "lumped" with the discount on bonds payable and
"netted" against the premium on bonds payable.

Illustration 1 – Discount and bond issue cost
• On January 1, 2020, an entity issued three-year bonds with
face amount of Pl0,000,000 and 9% stated rate.
• The bonds mature on January 1, 2023 and interest is
payable annually on December 31.
• The bonds are issued at P9,751,210 with an effective yield
of 10% before considering the bond issue cost.
• The entity paid bond issue cost of P239.880.

EFFECTIVE INTEREST
METHOD – DISCOUNT AND
BOND ISSUE COST
Face amount
Discount on bonds payable (
₱ 10,000,000
248,790 )
Issue price ₱ 9,751,210
Bond issue set ( 239,880 )
Net proceeds ₱ 9,511,330

PV of principal (10,000,000 x .7312) ₱ 7,312,000
PV of interest payments (900,000 x 2.4437) 2,199,330
Total present value ₱ 9,511,330
Coincidentally, the present value of the bonds payable of

₱ 9,511,330 is the same as the net proceeds of P9,511,330.

JOURNAL ENTRIES
1. To record the issuance of bonds:
Cash ₱ 9,511,330
2. To record the annual interest payment:

Interest expense (10,000,000 x 9%) ₱ 900,000
Cash ₱ 900,000

JOURNAL ENTRIES
1. To record the amortization of the discount on bonds
payable using the effective interest method:

Interest expense (9,511,330 x 11%) ₱ 1,046,246

Interest paid (10,000,000 x 9%) 900,000
Amortization of discount on bonds payable ₱ 146,246

GETTING EFFECTIVE RATE
USING FINANCIAL
1. Enter negative P10,000,000 (cash outflow for principal),
CALCULATOR
press FV
2. Enter negative P900,000 (cash outflow for interest),

press PMT
3. Enter 3 (maturity), press N

4. Enter positive P9,511,330 (net proceeds), press PV
5. Press comp (compute) and i% (effective rate)
6. Press EXE (execute)
7. The financial calculator will yield an answer of 11%

Illustration 2 – Discount and bond issue cost
• On January 1, 2020, an entity issued 5-year bonds with face
amount of Pl0,000,000 and 95%.
• The nominal rate is 10% and the interest payable annually
on December 31.
• The bonds mature on January 1,2025. The entity paid bond
issue cost of ₱200,0000.

EFFECTIVE INTEREST
METHOD – DISCOUNT AND
BOND ISSUE COST
Face amount
Discount on bonds payable (
₱ 10,000,000
500,000 )

PV of principal ₱ 5,935,000
PV of interest payments 3,695,900
• Since the net proceed is lower than the present value of

bonds payable, another interpolation using another rate of
12% will be made.

• Now that net proceeds are higher than the present value of
the bonds payable using 12% interest rate. This means that
the effective rate must be lower than 12%.

• With these scenario, the differential between
11% and 12% is interpolated as follows:
X – 11%
12% - 11%

• The present values applicable to the rates are then
substituted as follows:
• .94 will be added to 11% to get an effective rate of 11.94%.

ILLUSTRATION 1 –
PREMIUM AND
• On January 1, 2020, an entity issued 5-year bonds with
BOND ISSUE COST
face amount of ₱l0,000,000 at 105. The nominal rate is
10% and the interest is payable annually on December 31.
• The bonds mature on January 1, 2025. The entity paid

bond issue cost of ₱200,000.

Face amount ₱ 10,000,000
Cash ₱ 10,300,000

• Since the net proceed is lower than the present value of

bonds payable, this means that the effective rate must be
between 9% and 10%.

• The differential rate between 9% and 10% is interpolated
as follows:
X – 9%
10% - 9%

• Substituting the present value applicable to the
corresponding rate:
• Thus, the effective rate is 9.23% (9% plus .23)

BSA-3103
C H APTER 7 (PA RT I ) :
COMPOUND
FINANCIAL
INSTRUMENTS
Bal an a , Ro se A n n e I.
TOPICS COVERED:
• Definition of financial instrument
• Financial liability
• Equity instrument
• Compound financial instrument
• Accounting for compound financial instrument
• Bonds payable issued with share warrants
• Convertible bonds payable
COMPOUND FINANCIAL INSTRUMENTS

Financial Instruments

• PAS 32, paragraph 11, defines financial instrument as
any contract that gives rise to both a financial asset of
one entity and a financial liability or equity instrument of
another entity.
• It encompasses a financial asset, a financial liability and

an equity instrument.

Characteristics of a
Financial Instrument
a. There must be a contract.
b. There are at least two parties to the contract.
c. The contract shall give rise to a financial asset of one

party and financial liability or equity instrument of
another party.

Examples of
a. Cash in the form of notes and coins – (holder – bearer)
b. Cash in the form of checks – (payee - issuer)
c. Cash in bank – (depositor – depository bank)
d. Trade accounts – (seller – buyer)
e. Notes and loans – (lender – borrower)
f. Debt securities – (investor – issuer)
g. Equity securities – (investor – issuer)


Financial Liability
A financial liability is any liability that is a contractual
obligation:
a. To deliver cash or other financial asset to another

entity.
b. To exchange financial instruments with another entity
under conditions that are potentially unfavorable.

Financial Liability

Examples of
Financial Liabilities
a. Trade accounts payable
b. Notes payable
c. Loans payable
d. Bonds payable

Nonfinancial
Liabilities
a. Deferred revenue and warranty obligations
b. Income tax payable
c. Constructive obligations

Equity Instruments
• It reflects the basic accounting equation that equity
equals asset minus liability.
• An equity instrument is any contract that evidences a

residual interest in the assets of an entity after deducting
all of the liabilities.
• It includes ordinary share capital, preference share capital

and warrants or option.

Equity Instruments

Compound
• PAS 32, paragraph 28, defines a compound financial
instrument as “a financial instrument that contains both
a liability and an equity element from the perspective of
the issuer”.
• Common examples are:

a. Bonds payable issued with share warrants
b. Convertible bonds payable

Compound

Accounting for
Compound Instrument
• Contains both a liability and an equity
 PAS 32 mandates that such components shall be
accounted for separately.
 SPLIT ACCOUNTING
- Considerations received shall be allocated between
the liability and equity components.

Bonds Payable issued
With Share Warrants
• Two securities are sold – the bonds and the share
warrants.
• Share warrants attached to the bond may be detachable

or nondetachable.
• PAS 32 does not differentiate whether the equity

component is detachable or nondetachable.

Allocation of
Issue Price
• The bonds are assigned an amount equal to the “market
value of the bonds ex-warrants”, regardless of the
market value of the warrants.
• The residual amount of the issue price shall then be

allocated to the warrants.
*A contract that evidences a residual interest in the assets

of an entity after deducting all the liabilities.

Illustration:
An entity issued 5,000 10-year bonds, face amount P1,000
per bond, at 105.
Each bond is accompanied by one warrant that permits the

bondholder to purchase equity shares, par P50, at P55 per
share, or a total of 100,000 shares, 5,000 x 20.
The market value of the bond ex-warrant at the time of

issuance is 98.

Journal Entries:
1. To record the issuance of the bonds:
Cash (5,000,000 x 105) 5,250,000
Share warrants outstanding 350,000
Issue price of bonds with warrants 5,250,000

Market value of bonds ex-warrants (5,000,000 x 98) (4,900,000)
Residual amount allocated to warrants 350,000

Journal Entries:
2. To record the exercise of 60% of the warrants:
Cash (60,000 shares x 55) 3,300,000
Share warrants outstanding (.6 x 350,000) 210,000
Share capital (60,000 shares x 50) 3,000,000
Share premium 510,000

Journal Entries:
3. To record the expiration of the remaining warrants:

Share premium – unexercised warrants 140,000

Market value of bonds
ex-warrants unknown
The market value of the bonds ex-warrants of 98 is
available. Suppose such market value is not known.
Present value of the principal

Present value of the principal
bond liability
bond liability
Amountallocated
Amount allocatedtotothe
bonds
the = ++
bonds Present value of the future

Present value of the future
interest payments (effective or
interest payments (effective or
market interest rate)
market interest rate)

ex-warrants unknown
Assume the interest is payable annually at a nominal rate of
10% per annum.
When the bonds are issued, the prevailing market rate of

interest for similar bonds without warrants is 12% per
annum.

ex-warrants unknown
Present Value of 1 0.322
Present Value of ordinary annuity of 1 5.65

ex-warrants unknown
Present value of principal (5,000,000 x 0.322) 1,610,000
Present value of interest of payments
(.1 x 5,000,000 = 500,000 x 5.65) 2,825,000
Issue price of bonds with warrants 5,250,000

Present value of bonds payable (4,435,000)
Residual amount allocated to warrants 815,000

Journal Entry:
To record the issuance of bonds:
Cash 5,250,000
Discount on bond payable 565,000
Bond payable 5,000,000

BSA-3103
C H APTER 7 (PA RT I I ):
COMPOUND
FINANCIAL
INSTRUMENTS
Ba r uel , D an e Blessed S.
CONVERTIBLE
BONDS
Convertible Bonds are those which give the holders the
right to convert their bondholdings into share capital or
other securities of the issuing entity within a specified
period of time.
When convertible bonds are issued at premium or

discount, amortization period is up to the maturity date
instead of the conversion date because it is impossible
to predict, if at all, that the conversion privilege will be
exercised.
Accounting problems arise in two situations namely:

a. When the convertible bonds are originally issued
b. When the convertible bonds are converted

ORIGINAL
ISSUANCE
Convertible bonds are conceived as compound
financial instruments.
The issue price of the convertible bonds shall be

allocated between the bonds payable and the
conversion privilege.

ALLOCATION OF
ISSUE PRICE
The bonds are assigned an amount equal to the market
value of the bonds without the conversion privilege.
The residual amount or remainder of the issue price

shall then be allocated to the conversion privilege or
equity component.
In the absence of market value of the bonds without

conversion privilege, the amount allocated to the bonds
is equal to the present value of the principal bond
liability plus the present value of future interest
payments using the effective or market interest rate for
similar bonds without conversion privilege.
ILLUSTRATION
An entity issued 5,000 5-year bonds, face amount

₱1,000 each at 105. The bonds contain a conversion
privilege that provides for an exchange of a ₱1,000
bond for 20 equity shares with par value of ₱50. It is
reliably determined that the bonds would sell only at 98
without the conversion privilege.

ILLUSTRATION
Total issue price 5,250,000
Issue price of bonds without
conversion privilege (5,000,000x98%) (4,900,000)
Residual amount allocated to conversion privilege 350,000
Bonds Payable 5,000,000

Allocated issue price 4,900,000

ILLUSTRATION

MARKET VALUE OF
BONDS UNKNOWN
Using the preceding illustration, assume that the
interest on the bonds is payable semiannually at a
nominal rate of 8% per annum.
When the bonds are issued, the prevailing market rate

of interest for similar bonds without conversion
privilege is 10% per annum.
The present value of 1 at 5% for 10 periods is 0.6139

and the present of an ordinary annuity of 1 at 5% for 10
periods is 7.72

ILLUSTRATION

ILLUSTRATION

CONVERSION OF
BONDS
The carrying amount of the bonds is the measure of the
share capital issued because the carrying amount is the
“effective price” for the shares issued as a result of the
conversion.
Application Guidance 32 of PAS 32 provides that there

is no gain or loss on conversion at maturity.
The carrying amount of the bonds is equal to the face

amount plus accrued interest if not paid, plus
unamortized premium or minus unamortized discount
and bond issue cost.
ACCOUNTING
PROCEDURES
The amortization and issue cost or premium up to the
date of conversion shall be recorded.
The face amount of the bonds converted shall be

canceled together with the related unamortized
premium or discount and issue cost.
Normally, conversion is at an interest date. When at

other dates, the accrued interest up to the date of
conversion is ordinarily paid.

ILLUSTRATION

ILLUSTRATION
On the same date, the bonds are converted into share

capital. The conversion ratio is 20 shares for each
₱1,000 bond or a total of 100,000 shares.
Cost incurred in connection with the conversion

amounts to ₱100,000. The accrued interest on the
bonds payable on the date of conversion is ₱150,000
which is paid in cash.

ILLUSTRATION

ILLUSTRATION

PAYMENT OF
CONVERTIBLE BONDS AT
MATURITY
On December 31, 2020, the statement of financial position showed
the following balances before payment:
Bonds Payable-due December 31, 2020 5,000,000

Share Capital 10,000,000
Share Premium-issuance 4,000,000
Share Premium-conversion option 400,000
The bonds are convertible and originally issued on January 1, 2011.

The stated rate interest is 10% payable annually every December 31.
The original issue price of the convertible bonds was ₱6,000,000
allocated as follows:

ILLUSTRATION

ILLUSTRATION

PAYMENT OF
CONVERTIBLE BONDS
BEFORE MATURITY

ILLUSTRATION
The interest is payable annually every December 31. The
convertible bonds are not converted but fully paid on
December 31, 2020.
On December 31, 2020, the quoted price of the

convertible bonds with conversion privilege is 108 which
is the payment to the bondholders plus interest.
However, the quoted price of the bonds without the

conversion privilege is 103.

ILLUSTRATION
T I T L E OF T H E RE P ORT
ILLUSTRATION

ILLUSTRATION

BSA-3103
C H APTER 7 (PA RT I I ):
COMPOUND
FINANCIAL
INSTRUMENTS
Ba r uel , D an e Blessed S.
CONVERTIBLE
BONDS
Convertible Bonds are those which give the holders the
right to convert their bondholdings into share capital or
other securities of the issuing entity within a specified
period of time.
When convertible bonds are issued at premium or

discount, amortization period is up to the maturity date
instead of the conversion date because it is impossible
to predict, if at all, that the conversion privilege will be
exercised.
Accounting problems arise in two situations namely:

a. When the convertible bonds are originally issued
b. When the convertible bonds are converted

ORIGINAL
ISSUANCE
Convertible bonds are conceived as compound
financial instruments.
The issue price of the convertible bonds shall be

allocated between the bonds payable and the
conversion privilege.

ALLOCATION OF
ISSUE PRICE
The bonds are assigned an amount equal to the market
value of the bonds without the conversion privilege.
The residual amount or remainder of the issue price

shall then be allocated to the conversion privilege or
equity component.
In the absence of market value of the bonds without

conversion privilege, the amount allocated to the bonds
is equal to the present value of the principal bond
liability plus the present value of future interest
payments using the effective or market interest rate for
similar bonds without conversion privilege.
ILLUSTRATION
An entity issued 5,000 5-year bonds, face amount

₱1,000 each at 105. The bonds contain a conversion
privilege that provides for an exchange of a ₱1,000
bond for 20 equity shares with par value of ₱50. It is
reliably determined that the bonds would sell only at 98
without the conversion privilege.

ILLUSTRATION
Total issue price 5,250,000
Issue price of bonds without
conversion privilege (5,000,000x98%) (4,900,000)
Residual amount allocated to conversion privilege 350,000
Bonds Payable 5,000,000

Allocated issue price 4,900,000

ILLUSTRATION

MARKET VALUE OF
BONDS UNKNOWN
Using the preceding illustration, assume that the
interest on the bonds is payable semiannually at a
nominal rate of 8% per annum.
When the bonds are issued, the prevailing market rate

of interest for similar bonds without conversion
privilege is 10% per annum.
The present value of 1 at 5% for 10 periods is 0.6139

and the present of an ordinary annuity of 1 at 5% for 10
periods is 7.72

ILLUSTRATION

ILLUSTRATION

CONVERSION OF
BONDS
The carrying amount of the bonds is the measure of the
share capital issued because the carrying amount is the
“effective price” for the shares issued as a result of the
conversion.
Application Guidance 32 of PAS 32 provides that there

is no gain or loss on conversion at maturity.
The carrying amount of the bonds is equal to the face

amount plus accrued interest if not paid, plus
unamortized premium or minus unamortized discount
and bond issue cost.
ACCOUNTING
PROCEDURES
The amortization and issue cost or premium up to the
date of conversion shall be recorded.
The face amount of the bonds converted shall be

canceled together with the related unamortized
premium or discount and issue cost.
Normally, conversion is at an interest date. When at

other dates, the accrued interest up to the date of
conversion is ordinarily paid.

ILLUSTRATION

ILLUSTRATION
On the same date, the bonds are converted into share

capital. The conversion ratio is 20 shares for each
₱1,000 bond or a total of 100,000 shares.
Cost incurred in connection with the conversion

amounts to ₱100,000. The accrued interest on the
bonds payable on the date of conversion is ₱150,000
which is paid in cash.

ILLUSTRATION

ILLUSTRATION

PAYMENT OF
CONVERTIBLE BONDS AT
MATURITY
On December 31, 2020, the statement of financial position showed
the following balances before payment:
Bonds Payable-due December 31, 2020 5,000,000

Share Capital 10,000,000
Share Premium-issuance 4,000,000
Share Premium-conversion option 400,000
The bonds are convertible and originally issued on January 1, 2011.

The stated rate interest is 10% payable annually every December 31.
The original issue price of the convertible bonds was ₱6,000,000
allocated as follows:

ILLUSTRATION

ILLUSTRATION

PAYMENT OF
CONVERTIBLE BONDS
BEFORE MATURITY

ILLUSTRATION
The interest is payable annually every December 31. The
convertible bonds are not converted but fully paid on
December 31, 2020.
On December 31, 2020, the quoted price of the

convertible bonds with conversion privilege is 108 which
is the payment to the bondholders plus interest.
However, the quoted price of the bonds without the

conversion privilege is 103.

ILLUSTRATION

ILLUSTRATION

ILLUSTRATION

BSA-3103
C H APTER 8 :
NOTE
PAYABLE
Ca ten a, Ma ica C .
NOTE PAYABLE
A promissory note is an unconditional promise in writing
made by one person to another, signed by the maker,
engaging to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to bearer.
N O T E PA YA B L E
INITIAL
MEASUREMENT
PFRS 9, paragraph 5.1.1, provides that a note payable
not designated at fair value through profit or loss shall be
measured initially at fair value minus transaction costs that
are directly attributable to the issue of the note payable.
However, if the note payable is irrevocably designated at

fair value through profit or loss, the transaction costs are
expensed immediately.
N O T E PA YA B L E
INITIAL
MEASUREMENT
The fair value of the note payable is equal to the present
value of the future cash payment to settle the note payable
using the market rate of interest.
N O T E PA YA B L E
SUBSEQUENT
MEASUREMENT
PFRS 9,paragraph 5. 3. 1, provides that after initial
recognition, a note payable shall be measured:
a. At amortized cost using the effective interest method.
b. At fair value through profit or loss if the note payable is

designated irrevocably as measured at fair value through
profit or loss.
N O T E PA YA B L E
AMORTIZED COST
The amortized cot of the note payable is the amount at
which the note payable is measured initially:
a. Minus principal repayment
b. Plus or minus the cumulative amortization using the

effective interest method of any difference between the
face amount and present value of the note payable.
N O T E PA YA B L E
NOTE ISSUED
SOLELY FOR CASH
When a note is issued solely for cash, the present value is
equal to the cash proceeds.
Illustration
On November 1, 2020, an entity discounted its own note of

P1,000,000 at 12% for one year.
Note payable P 1,000,000

Less: Discount ( 12% of P1M) 120,000
Net Proceeds P 880,000
N O T E PA YA B L E
JOURNAL ENTRY
Nov. 1, 2020
Cash P 880,000
Discount on Note Payable 120,000
Note Payable P1,000,000
Dec. 31, 2020
Interest Expense P 20,000

Discount on note payable P 20,000
N O T E PA YA B L E
NOTE ISSUED
SOLELY FOR CASH
If a statement of financial position is prepared on
December 31, 2020, the note payable is classified and
reported as current liability.
Note Payable P 1,000,000

Discount on note payable ( 100,000)
Carrying Amount P 900,000
N O T E PA YA B L E
INTEREST BEARING
NOTE ISSUED FOR
PROPERTY
When a property or noncash asset is acquired by issuing
a promissory note which is interest bearing, the property or
asset is recorded at the purchase price.
The purchase price is reasonably assumed to be the

present value of the note and therefore, the fair value of the
property because the note issued is interest bearing.
N O T E PA YA B L E
INTEREST BEARING
NOTE ISSUED FOR
PROPERTY
Illustration
On January 1, 2020, an entity acquired an equipment for P

1,000,000 payable in 5 annual equal installments every
December 31 of each year. Interest is 10% on the unpaid
balance.
N O T E PA YA B L E
JOURNAL ENTRIES
2020
Jan. 1 Equipment P 1,000,000 Note

payable P 1,000,000
Dec. 31Interest Expense 100,000

Note payable 200,000
Cash 300,000
Payment of the first installment and

the interest for 2020
N O T E PA YA B L E
JOURNAL ENTRIES
2021
Dec. 31 Interest Expense P 80,000

Cash P 280,000
Payment for second installment and

interest for 2021
N O T E PA YA B L E
NONINTEREST BEARING
NOTE ISSUED FOR
PROPERTY
When a noninterest baring note is issued for property,
the property is recorded at the cash price of the property.
The difference between the cash price and the face of

the note issued represents the imputed interest.
The imputed interest is based on the sound philosophy

that no lender would part away with his money or property
interest-free.
N O T E PA YA B L E
NONINTEREST BEARING
NOTE ISSUED FOR
PROPERTY
llustration
On January 1, 2020, an entity acquired an equipment with a

cash price of P350,000 for P500,000, P100,000 down and
the balance payable in 4 equal annual installments.
Face Amount P 500,000

Cash Price (350,000)
Discount on N/P P 150,000
N O T E PA YA B L E
JOURNAL ENTRIES
2020
Jan. 1Equipment P 350,000

Discount on note payable 150,000
Cash P 100,000
Dec. 31Note payable P 100,000

Cash 100,000
N O T E PA YA B L E
NONINTEREST BEARING
NOTE ISSUED FOR
PROPERTY
N O T E PA YA B L E
NO CASH PRICE
On January 1 2020, an entity acquired an equipment for
P1,000,000 payable in 5 equal annual installments on every
December 31 of each year.
In this case, the cost of the equipment is equal to the

present value of the P200,000 annual installments in 5
years at an appropriate rate of 10%.
The rate of 10% is assumed to be the prevailing rate of

interest.
PV of ordinary annuity of 1 for 5 years at 10% = 3.7908

P200,000 x 3.7908 = P 758, 160 - Present Value
N O T E PA YA B L E
JOURNAL ENTRIES
Jan 1 Equipment P 758,160
Note payable P 1,000,000
Dec 31 Note payable P 200,000

Cash P 200,000
Interest expense P 75,816

N O T E PA YA B L E
NO CASH PRICE
N O T E PA YA B L E
NO CASH PRICE
On December 31, 2020, the current portion of the note
payable would be reported as current liability.
Note payable P 200,000

Discount on note payable ( 63, 398)
Carrying amount - amortized cost P 136, 602
The non current portion of the N/P would be reported as

noncurrent liability.

Discount on note payable ( 102, 626)
Carrying amount - amortized cost P 497, 374
N O T E PA YA B L E
NONINTEREST
BEARING – LUMP
SUMOn January 1, 2020, an entity acquired an equipment for
P1,000,000. The entity paid P 100,000 down and signed a
noninterest bearing note for the balance which is due after
three years on January 1, 2023.
No established cash price. The prevailing interest rate for

this type of note is 10%. The present value of 1 is .7513.
N O T E PA YA B L E
NONINTEREST
BEARING – LUMP
SUM
Computation
Down payment P 100,000

Present value of note ( 900,000 x .7513) 676,170
Cost of equipment P 776,170
Imputed Interest
Face value of the note P 900,000

Present value of note (676,170)
Imputed interest P 223,830
N O T E PA YA B L E
JOURNAL ENTRIES
1) To record the purchase of equipment on January 1,
2020:
Equipment P 776,170
Cash P 100,000
2) To record the interest expense for 2020:

Interest expense P 67,617
• The discount on note payable is amortized as interest
expense using the “effective interest” method.
N O T E PA YA B L E
JOURNAL ENTRIES
3) To record the full payment of the note on January 1,
2023

Cash P 900,000
N O T E PA YA B L E
NONINTEREST
BEARING – LUMP
SUM
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
PFRS 9, paragraph 4.2.2, provides that at initial
recognition, a note payable may be irrevocably designated
as at fair value through profit or loss.
PFRS 9, paragraph 5.7.7, provides that the gain or loss

on financial liability designated at fair value through profit
or loss shall be accounted for as follows:
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
a. The change in fair value attributable to the credit risk is
recognized in other comprehensive income.
Credit risk is the risk that (where) the issuer of the liability
would cause a financial loss to the other party by failing to
discharge the obligation. It does not include market risk
such as interest risk, currency risk and price risk.
b. The remaining amount of the change in fair value is

recognized in profit or loss.
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
Application Guidance B5. 7. 9 provides that amount
recognized in other comprehensive income resulting from
change in fair value attributable to credit risk shall not be
subsequently transferred to profit or loss.
However, the cumulative gain or loss recognized may be

transferred within equity or retained earnings.
There is no amortization of discount and premium on note

payable. Interest expense is recognized using the nominal
or stated interest rate.
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
Illustration
On January 1, 2020, an entity borrowed from a bank P

4,000,000 on a 12% 5-year interest bearing note. The entity
received P 4,000,000 which is the fair value of the note on
January 1, 2020. Transaction costs of P 100,000 was paid
by the entity.
The fair value of the note payable was P3,500,000 on

December 31,2020.
The entity has elected irrevocably the fair value option for
measuring the note payable.
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
The change in fair value comprised P50,000 attributable to
credit risk and P450,000 attributable to interest risk.
Journal Entries for 2020
Jan 1 Cash P 4,000,000

Note Payable P 4,000,000
Transaction Cost P 100,000

Cash P 100,000
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
Dec 31Interest Expense P 480,000
Cash P 480,000
Note Payable P 500,000

Gain from change in fair value 450,000
Gain from credit risk - OCI 50,000
N O T E PA YA B L E
FAIR VALUE
OPTION OF
MEASURING N/P
Carrying Amount P 4,000,000
Fair Value - Dec 31, 2020 3,500,000
Decrease in fair value of liability - Gain P 500,000
The gain from change in fair value is recognized in profit

or loss.
The gain from credit risk is recognized in other

comprehensive income.
N O T E PA YA B L E
BSA-3103
C H APTER 9 :
DEBT
RESTRUCTURI
NG
Ba l an e, J ao Bryll e
DEBT
RESTRUCTURING
situation where the creditor, for economic or legal
reasons related to the debtor's financial difficulties,
grants to the debtor concession that would not
otherwise be granted in a normal business relationship.
DEBT RESTRUCTURING
CONCESSION
- agreement between the creditor and debtor.
-imposed by law or a court.
DEBT RESTRUCTURING
OBJECTIVE OF THE
CREDITOR
-to make the best of a bad situation
-maximize recovery of investment
-The creditor usually sustains an accounting loss and the

debtor usually realizes an accounting gain.
DEBT RESTRUCTURING
TYPR OF DEBT
RESTRUCTURING
1. Asset swap
2. Equity swap
3. Modification of terms
DEBT RESTRUCTURING
ASSET SWAP
- transfer by the debtor to the creditor of any asset, such as
real estate, inventory, receivables and investment, in full
payment of an obligation.
DEBT RESTRUCTURING
UNDER PFRS 9,
PARAGRAPH 3.3.1
- treated as a derecognition of a financial liability or
extinguishment of an obligation
-difference between the carrying amount of the financial
liability and the consideration given shall be recognized in
profit or loss
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
UNDER USA GAAP
-recorded as if two transactions have taken place, the sale
of the asset and the extinguishment of the liability
- two gains or losses are recognized
DEBT RESTRUCTURING
UNDER USA GAAP
Gain or loss on exchange = fair value of the asset - carrying

amount
Gain or loss from restructuring = carrying amount of the

liability - fair value of the asset
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DACION EN PAGO
-when a mortgaged property is offered by the debtor in full
settlement of the debt.
-shall be accounted for as an "asset swap"
- requires recognition of gain or loss based on the balance
of the obligation including accrued interest and other
charges
DEBT RESTRUCTURING
DACION EN PAGO
Gain on extinguishment if:
balance of the obligation > carrying amount of the property
mortgaged
Loss on extinguishment if:

balance of the obligation < carrying amount of property
mortgaged
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
EQUITY SWAP
-a debtor and creditor may renegotiate the terms of a
financial liability with the result that the liability is fully or
partially extinguished by the debtor issuing equity
instruments to the creditor
- issuance of share capital by the debtor to the creditor in
full or partial payment of an obligation
DEBT RESTRUCTURING
EQUITY SWAP
IFRIC 19 provides that When equity instruments issued to
extinguish all or part of a financial liability are recognized
initially, an entity shall measure the equity instruments at
the fair value of the equity instruments issued, unless that
fair value cannot be reliably measured
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
The equity instruments issued to extinguish a financial
liability shall be measured at the following amounts in the
order of priority:
1. Fair value of equity instruments used
2. Fair value of liability extinguished
3. Carrying amount of liability extinguished
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
Modification of Terms -change of terms, may involve either
the interest, maturity value or both
Interest concession -reduction of interest rate - forgiveness

of unpaid interest -moratorium on interest
Maturity value concession - extension of the maturity date -

reduction of the principal amount
DEBT RESTRUCTURING
UNDER PFRS 9,
PARAGRAPH 3.3.2
-a substantial modification of terms of an existing financial
liability shall be accounted for as an extinguishment of the
old financial liability and the recognition of a new financial
liability
DEBT RESTRUCTURING
UNDER
APPLICATION
GUIDANCE B 3.3.6
-there is substantial modification of terms if the gain or
loss on extinguishment is at least 10% of the old financial
liability
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
The difference between the carrying amount of the old
liability and the present value of new or restructured liability
shall be accounted for as gain or loss extinguishment of
debt.
The old effective rate is used in computing the present
value of the new liability.
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
PFRS 9, PARAGPARH
B5.4.6
if the gain or loss is less than 10%:
there is no substantial modification of terms and thus, the

modification is an extinguishment of liability.
there is gain or loss on modification rather than
extinguishment
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
DEBT RESTRUCTURING
DEBT
RESTRUCTURING
Credits:https://www.youtube.com/watch?v=4LMK9fSLfYA
DEBT RESTRUCTURING

Noncurrent Liabilities - Chapters 5-9

Uploaded by

Copyright:

Available Formats

Noncurrent Liabilities - Chapters 5-9

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Noncurrent Liabilities - Chapters 5-9

Uploaded by

Copyright:

Available Formats

BSA-3103

Coupon or Bearer Bonds

• If bonds with face amount of P50,000,000 are sold,

P50,000,000 / P1,000= 50,000

• When an entity sells bonds issues, it undertakes to

On January 1,2020, an entity is authorized to issue 10-

To record the sale of bonds at face amount:

Entry record the amortization of the bond premium:

Cash (5,000,000 x 95%) P4,750,000

Interest Expense (250,000/10yrs) P25,000

Are transaction costs directly attributable to the issue

On March 1, 2020, an entity sold bonds with face

Inasmuch as the bonds are sold on March 1, 2020, the

Dec. 1 Interest Expense P300,000

Dec. 31 Interest Expense P17,500

June 1 Interest Expense P300,000

Dec. 1 Interest Expense P300,000

Dec. 31 Interest Expense P30,000

*Discount on bonds payable

To record the issue of the bonds on April 1, 2020

Interest Expense (5,000,000 x12%x ½) P300,000

Payment of first semiannual interest

Premium on bonds payable P36,000

Monthly amortization (228,000x57months) P4,000

Amortization for 9 months from Apr 1 to

An entity sold bonds with face amount of P5,000,000 on March

Bonds Payable P5,000,000

1. The bond premium or bond discount should be

On March 1, 2020, bonds with face amount of

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

Discount on bonds payable- March 1, 2020 P270,000

Retirement price (P5,000,000 x 97) P4,850,000

Bonds Payable P5,000,000

Carrying amount of bonds payable P4,910,000

Suppose in the preceding illustration, not all the bonds

Suppose only bonds with face amount of

The same procedures discussed previously are followed.

Interest expense 27,000

On July 1, 2023, after recording the discount amortization, the

Retirement price (1,000,000x97)

b. Carrying amount of bonds retired and gain on retirement

Remaining journal entries for 2023

Dec. 31. Interest expense 160,000

Dec. 31. Interest expense 21,600

• Treasury bonds should be debited at face amount at face amount

An entity originally issued bonds with the face amount

Subsequently, the entity reacquired P1,000,000 face

At the time of the reacquisition, the unamortized

Reacquisition price P1,030,000

Treasury bonds 1,000,000

* The treasury bonds when not subsequently sold are simply

Carrying amount P4,160,000

• Also known as bond refinancing, is a premature retirement of the

• When refunding is made on date of acquisition of old bonds, no

• When refunding is made prior to the maturity date of the old

• The difference between the carrying amount of the financial

2. Refunding of old 12% bonds,with remaining life of 4years, at 102

Bonds payable-old 1,000,000

2. To record the retirement of the old bods payable:

Bonds payable 1,000,000