Bonds Payable

A bond is a cer-ficate of indebtedness whereby the borrower agrees to pay a sum of money at
a specified future date plus periodic interest payments at the stated rate.

Types of Bonds
1. Term bonds and serial bonds
Bonds that mature on a single date are called term bonds while bonds that mature in
installments are called serial bonds.
2.Secured bonds and unsecured bonds
Secured bonds provide security and protec-on to investors in the form of specific assets of the
issuer, such as real estate or other collateral. On the other hand, unsecured bonds, frequently
termed as debentures, are not protected by the pledge of any specific asset of the issuing
corpora-on.
3. Registered bonds and bearer bonds
Registered bonds are bonds whose owners' names are registered in the books of the issuing
corpora-on. Bearer bonds or coupon bonds are not recorded in the name of the
owner.
4. Callable and conver-ble bonds
Callable or redeemable bonds are those that give the issuing company the right to call or re-re
the bonds before maturity date, usually specified on the bond indenture.
The issuing company pays the bondholder an amount in accordance with the call provisions.
Conver-ble bonds are those that give the bondholders the right to exchange their bond
holdings into a specified or predetermined number of the issuing corpora-on's shares of stock.
5. Zero interest bonds
Zero-interest bonds, also known as deep-discount bonds, are issued at significantly lower than
their face value.

Notes
• An entity shall recognize financial liability in its statement of financial position
when, and only when, the entity becomes a party to the contractual provisions of
the instrument.
• Bonds payable are initially recognized at the date of the actual issue of the bonds.
• When the issue price is less than the face value, the difference is referred to as a
discount. Discount on bonds is reported as a direct deduction from the face value
of bonds payable.
• If the price of the bonds will exceed the face amount the bonds will be sold at a
premium. Premium on bonds is an adjunct account and reported as an addition
to the face value of bonds payable. For premium, interest expense decreases,
premium amortization increases, and carrying value decreases.
• When bond quotations are not available, the market price can be determined by
discounting the maturity value of the bond and all interest payments at the
market rate of interest for similar debt on that date. For discount, interest
expense increases, premium amortization increases, and carrying value
increases.
 • The bondholder is usually required to purchase the interest that has accrued from
the most previous interest date to the date of sale. This accrued interest is
added to the issue price of the bond to determine the total cash proceeds from
the bond issuance.
• Bond issue cost form part of the initial carrying amount of the bond liability.

Problem I
Ella Corpora-on issued on January 1, 2022 a P1,000,000 face value, 5-year, with stated rate of
15% bond for P1,110,401. An issue price that provides a yield of 12%. Interest on the bonds is
payable semi-annually on June 30 and December 31.

1. How much is the ini-al premium?

2. How much is the bonds payable on December 31, 2022?
3. How much is the bonds payable on December 31, 2023?
4. How much is the interest expense on December 31, 2022?
5. How much is the interest expense on December 31, 2023?

Problem II
Ella Corpora-on issued on January 1, 2022 a P1,000,000 face value, 5-year, with stated rate of
12% bond for P917,039. An issue price that provides a yield of 15%. Addi-onally, P20,000 was
incurred by Ella Corpora-on as bond issue cost. Interest on the bonds is payable semi-annually
on June 30 and December 31.

1. How much is the ini-al discount?

2. How much is the bonds payable on December 31, 2022?
3. How much is the bonds payable on December 31, 2023?
4. How much is the interest expense on December 31, 2022?
5. How much is the interest expense on December 31, 2023?

Re6rement of bond
If bonds are retired at their maturity date, any premium or discount will have been
completely amortized. The retirement is recorded as an ordinary payment of debt, and
no gain or loss is recognized upon retirement on maturity date.

If the bonds are retired prior to their maturity and retirement price is less than the
carrying amount of the bonds, the corporation realizes a gain on the retirement.
Similarly, if the retirement price is greater than the carrying value, a loss is incurred on
the retirement of the debt.

If bonds are retired before maturity date, the following must be observed:
1. The amortization of premium or discount must be updated to determine the carrying
amount of the bonds at the date of retirement.
2. Any accrued interest on the retired bonds from the most recent interest payment date
up to date of retirement must be recorded and paid.

Problem III
Ella Corporation issued bonds that have a face value of P1,000,000 and bear annual
interest rate of 15%, with interest payable semiannually on June 30 and December 31.
The bonds were sold at a price that yield 12%.

These bonds were later retired by Ella Corporation on October 31, 2025 @ 102 plus
accrued interest.

1. How much is the carrying amount on October 31, 2018 prior to retirement?
2. How much cash is paid by Ella Corporation to retire the bonds?
3. How much is the gain/loss from the retirement of bonds?

Bonds with Equity Characteristics

Corporations may issue bonds that allow creditors to ultimately become shareholders by
either attaching share warrants to the bonds or including a conversion feature in the
bond indenture.

1. Bonds with Non-Detachable Share Warrants issued

Bondholders are given the right to acquire a specified number of ordinary shares
(common stock) of the issuing corporation at a given price within a certain time period.

When warrants are included in the issue of bond, the issue price shall be allocated
between the debt (the bond) and the equity.

The equity component is assigned the residual amount after deducting from the fair
value of the compound instrument (bond with warrant) as a whole the amount
separately determined for the liability component. This method of bifurcation is called
the residual approach.

Problem IV
On December 31, 2022, Job Corporation issued 1,000 of its 10%, 10-year, P1,000 face
value bonds with non-detachable share warrants at 103. Each bond carried two
detachable warrants, each warrant entitling the holder for one share of ABC's P20 par
value ordinary Share at a specified option price of P25 per share. Immediately after
issuance, the bond without warrant sells at 97 and each ordinary share sells at P75.

1. How much is assigned to liability and equity respectively?

2. Prepare the journal entries for issuance and exercise of the warrants.
Problem VI
P5,000,000, 8% ten-year bonds were issued on bond issue date at 105 by Job
Corporation. Each P1,000 bond carried two non detachable share warrants, each
warrant entitling the holder to purchase one share of the Job Company’s P200 par value
ordinary share capital at P250 per share. Similar instruments without any equity
component are being traded at prices that yield 10%. Interest is payable annually.

1. How much is assigned to liability and equity respectively?

2. Prepare the journal entries for issuance and exercise of the warrants.

2. Convertible Bonds
Convertible bonds give the holders thereof the right to exchange their bondholding into
ordinary shares or other securities of the issuing company within a specified period of
time.

The principle of splitting the issue price of a compound financial instrument to its debt
component and equity component is applied.

When conversion takes place between interest payment dates, any accrued interest
should be paid in cash. Expenditures incurred related to conversion are recorded by
reducing the additional paid-in capital (share premium) pertaining to shares issued upon
conversion. Any excess of the expenditures over the related share.

No gain or loss is recognized upon conversion of bonds.

When convertible bonds are retired before maturity date, the proceeds from the
retirement shall be allocated to the liability to be settled and the equity portion for bond
conversion privilege.

Once the allocation of the consideration is made, any resulting gain or loss is treated in
accordance with accounting principles applicable to the related component as follows:
a. the amount of gain or loss relating to the liability component is recognized in profit or
loss; and
b. the amount of gain or loss relating to the equity component is recognized in equity.

Problem VII
Japeth Corporation issued P5,000,000, 14% bonds at 105 on bond issue date. Each
P1,000 bond is convertible into 5 shares of P100 par value. ordinary shares. Without the
conversion feature, the bonds would have sold at 102.

Before maturity date of the bonds, holders of P2,000,000 face value bonds exercised
their conversion privilege when each ordinary share sells for P130. Further assume that
on this date, the balance of premium on bonds payable is P30,000
1. How much is assigned to liability and equity respectively?
2. Prepare the journal entries upon issuance and exercise of the conversion privilege.

Problem VIII
In connection to Problem VII, assume that P1,000,000 of the bonds issued above were
retired when the total unamortized premium was P40,000. Further assume that interest
payment and premium amortization have been recorded properly. The P1,000,000
bonds were retired at 105. Without the conversion privilege, these bonds would have
sold at this date at 103.

1. How much is assigned to liability and equity respectively?

2. How much gain/loss is recognized at profit or loss?
3. How much gain/loss is recognized at equity?
4. Prepare the journal entries upon retirement.

Serial Bonds
Serial bonds are bonds that mature in series of installments.

Problem IX
P5,000,000, 12% bonds were issued on bond issue date, January 1, 2015 by Jad
Corporation. The principal of the bonds is paid in/series of P1,000,000 annually,
together with any accrued interest on the outstanding bonds, each December 31,
starting December 31, 2015. The bonds yield at 10%.

1. How much is the total cash received upon issuance of the bond?
2. How much is the discount/premium initially recognized?
3. How much is the carrying value of the bonds on December 31, 2017?

Long-Term Notes
Interest bearing notes
Problem X
Principal Matures in Lump sum, Interest is Payable Periodically
On March 31, 2022, Job Corporation issued a three-year, P4,000,000, 12% promissory
note for a machinery purchased. The interest on this note is payable annually on its
anniversary date. The company reports on a calendar year.

1. Prepare the journal entries up to payment.

Problem XI
Principal and interest are payable periodically
On March 31, 2022, the Yam Corporation issued a P3,000,000 12% promissory note for
a machinery purchased. Equal principal amount of P1,000,000 plus interest on the
unpaid balance of the principal are payable annually every March 31 starting March 31,
2023.
1. How much is the current and non-current portion on December 31, 2022; 2023; and
2024 respectively?

Non-interest bearing notes payable

A non-interest bearing note payable is written in a form where the face value includes
an imputed interest.

At date of issuance, the note payable is initially recorded at its amortized cost.

Problem XII
Maturity value is payable in lump sum
On March 31, 2022, JM Corporation issued a three-year, P4,000,000, non-interest
bearing promissory note for a machinery purchased. The equivalent cash price of the
machinery acquired is P3,005,200 and yield 10%.

1. How much is the initial discount?

2. Prepare the journal entries up to payment.

Problem XIII
Maturity value is payable in installments
On March 31, 2022, Erica Corporation issued a three-year, P3,000,000, non-interest
bearing promissory note for a machinery purchased. The note is payable in installments
of P1,000,000 every March 31, starting March 31, 2023. The equivalent cash price of
the machinery acquired is P2,401,800 and yield 12%.

1. How much is the initial discount?

2. How much is the carrying amount of the notes on December 31, 2022?
3. How much is the current and non-current portion on December 31, 2022 and 2023?

Troubled-debt restructuring
Troubled debt restructuring is when the creditor grants concession to the debtor that it
would not otherwise grant under normal conditions.

1. Settlement of Debt by Transfer of Assets (or Asset Swap)

A transfer of non-cash assets (real estate, receivables or other assets) can be used to
settle a debt obligation in a troubled debt restructuring:

The difference between the carrying amount of a financial liability (or part of a financial
liability) extinguished or transferred to another party and the consideration paid,
including any non-cash assets transferred or liabilities assumed, shall be recognized in
profit or loss.
Separate profit or loss accounts are shown for the gain or loss on the disposal of the
asset and the gain on debt restructure.

Problem XIV
Japeth Bank loaned P10,000,000 to Jad Realty which was invested in real estate
development. Due to economic downtrend in the real estate business, the company had
low sales and therefore, cannot meet its loan obligation. On December 31, 2022, the
loan's due date, Japeth Bank agrees to accept from Jad Realty land with fair value of
P9,000,000 in full settlement of the P10,000,000 principal and one-year accrued interest
at 12% or P1,200,000. The land has a carrying value, based on the cost model, in Jad
Realty's books of P10,500,000. Japeth Bank has not yet recognized any allowance for
bad debts.

In Jad Realty’s book determine the following:

1. How much is the gain/loss on exchange of asset?
2. how much is the gain/loss on debt restructuring
3. Prepare the journal entry upon debt restructuring.

In Japeth Bank’s book determine the following:

1. How much should the land be recorded?
2. How much should be recorded in the profit or loss?
3. Prepare the journal entry upon debt restructuring.

2. Settlement of Debt by Granting Equity Interest (or Equity Swap)

The issuance of the debtors' share capital can also be used to settle a debt obligation in
a troubled debt restructuring.

The equity instruments issued shall be measured at (in the order of priority):
a. the fair value of the equity instruments granted (shares of stock issued;
b. the fair value of the financial liability settled.
Any difference between the fair value used and the carrying value of the financial
liability settled is taken to profit or loss.

Problem XV
In connection with Problem XIV, sssume that Japeth Bank agreed to accept
Jad Realty's 180,000 ordinary shares. Jad Realty's ordinary share has a par value of
P50 and a fair market value of P60.

In Jad Realty’s book determine the following:

1. How much share premium should be recognized?
2. How much is the gain/loss on debt restructuring?
3. Prepare the journal entry upon debt restructuring.

In Japeth Bank’s book determine the following:

1. How much should the investment be recorded?
2. How much should be recorded in the profit or loss?
3. Prepare the journal entry upon debt restructuring.

3. Modification of terms
A troubled debt restructuring involving modification of terms may take the form of one or
any combination of the following:
a. Reduction of stated interest rate reduction of the face amount of the debt
b. Reduction or condonation of accrued interest
c. Extension of the maturity date
d. Moratorium on the payment of interest and / or principal

Derecognition of a financial liability through modification of debt terms is covered by

paragraph 3.3.2, IFS 9, which states that:
"An exchange between an existing borrower and lender of debt instruments with
substantially different terms shall be accounted, for as an extinguishment of the original
liability and recognition of a new financial liability".

The terms are substantially different if the discounted present value of the cash flows
under the new terms, including any fees paid and net of any fees received and
discounted using the original effective interest rate, is at least 10 percent different from
the discounted present value of the remaining cash flows of the original financial liability.

If an exchange of debt instruments between the lender and the borrower is not
accounted for as an extinguishment (that is, the terms are not substantially different)
any costs or fees incurred adjust the carrying amount of the liability and are amortized
over the remaining term of the modified liability.

Problem XVI
In connection with Problem XIV, assume that Japeth Bank agreed to the following
modifications on December 31, 2022:
a. Reduction of principal from P10,000,000 to P7,000,000;
b. Condonation of accrued interest;
c. Extension of maturity date to December 31, 2025; and
d. Interest rate has been changed from 12% to 8%

1. How much is the gain/loss on debt restructuring?

2. Prepare the journal entry upon debt restructuring.
3. How much is the discount on the restructured payable?

Problem XVII
In connection with Problem XIV, assume that Japeth Bank agreed to the following
modifications on December 31, 2022:
a. Reduction of principal from P10,000,000 to P9,500,000;
b. Condonation of accrued interest;
c. Extension of maturity date to December 31, 2025; and
d.Interest rate has been changed to 16%

1. How much is the gain/loss on debt restructuring?

2. Prepare the journal entry upon debt restructuring.
3. How much is the premium on the restructured payable?