INTERMEDIATE ACCOUNTING 2

QUIZ 1

BONDS PAYABLE ➔ The ISSUE PRICE of the bond is

● A promissory note is an unconditional the market price of the bond, which
promise in writing made by one person to varies with the safety of the
another, signed by the maker, engaging to investment and the prevailing
pay on de market rate of interest for similar
● Bonds are financial liabilities that are instruments.
subsequently measured at amortized cost. ● The rate of interest on the face of the bid
➔ The amortized cost of a financial is termed as the contract rate, stated rate,
liability is the amount at which it is or nominal rate of interest.
measured at initial recognition ➔ This interest rate depends on the
minus the principal repayments financial condition and earnings of
plus or minus the cumulative the issuing corporation. When the
amortization using the effective financial condition and earnings of
interest method. the issuing corporation.
● TYPES OF BONDS: ● BOND PRICES are quoted in the market
➔ TERM BONDS - matures on a as a percentage of face value.
single date ● When bond quotations are not available,
the market price can be determined by
➔ SERIAL BONDS - matures on a
discounting the maturity value of the bond
series of installments
and all interest payments at the market rate
➔ REGISTERED BONDS - the of interest for similar debt on that date.
creditor’s name is indicated in the ● The issue price of the bonds is equal to the
bond certificate present value of the maturity value plus the
➔ COUPON/BEARER BONDS - the present value of the periodic interest
creditor’s name is not indicated in payment, both discounted at the market
the bond certificate. Also known as rate of interest at the date the bonds are
unregistered bonds. issued.
➔ SECURED BONDS - bonds with ● When the bond year does not coincide with
collateral or security in case of the reporting period: If the bond year does
breach in debt undertaking not coincide with the reportineriod, other
➔ UNSECURED BONDS - bonds than the entries every interest payment
without any form of collateral or date, an adjusting entry made at year-end
security to accrue interest and update the
➔ COLLABLE BONDS - bonds which amortization of premium or discount.
can be called or retired by the
issuing debtor ISSUANCE OF BONDS
➔ BONDS WITH EQUITY
CHARACTERISTICS - bonds that
can be converted into ordinary ⬋ ⬊
shares (convertible bonds) or TERM BONDS SERIAL BONDS
bonds with attached equity security ↓ ↓
bonds that mature on a bonds that mature in
such as share warrants (bonds with
single date installments
share warrants) ↓ ↓
➔ ZERO-INTEREST BONDS - also
known as deep discount bonds. It
FV x PVSP xx FV x PVOA xx
issued at significantly lower than
their face value. PERIODIC xx PERIODIC xx
INTEREST x INTEREST x
ISSUANCE OF BONDS PVOA PVSP
● BONDS PAYABLE are initially recognized
at the date of the actual issue of the bonds. ISSUE PRICE xx ISSUE PRICE xx
● Bond liabilities are initially recognized at
their discounted value, which equals the Journal Entry:
net proceeds from their issuance. PREMIUM
Cash xx
 B/P xx
Premium xx
Premium on B/P xx
on B/P
DISCOUNT
Cash xx
PREMIUM
Discount on B/P xx
B/P xx
With accrued interest
*B/P account is recorded
Cash xx
at Face value
(Issue price +
accrued int)

INTEREST EXPENSE = CV of bonds x ER B/P xx

Premium on xx
NOMINAL INTEREST (FV x NR) B/P

xx Interest xx
Interest expense
payable
Cash or Int./P xx

DISCOUNT
AMORTIZATION (Nominal interest - effective
interest) Without accrued
interest
↑ DISCOUNT ↓ PREMIUM
Int. exp. xx Premium on B/P xx Cash xx
Discount on B/P xx Int. exp. xx
Discount on xx
B/P

B/P xx
ACCRUED INTEREST ON BONDS
ISSUED
DISCOUNT
● Date of payment of interest does not
coincide with: With accrued interest
➔ DATE OF ISSUANCE
➔ BALANCE SHEET DATE Cash (Issue xx
➔ DATE OF RETIREMENT price +
accrued int)
● FORMULA:
➔ FACE VALUE x NOMINAL RATE Discount on xx
x TIME (months accrued) B/P

B/P xx
DATE OF ISSUANCE
Int. payable xx
⬋ ⬊
EXCLUDE INCLUDE
↓ ↓ BOND ISSUE COST
INITIAL CV OF B/P CASH RECEIVED ● Expenditure incurred by the issuing
↓ ↓ company for legal fees, printing and
Journal entries: engraving of bond certificates, taxes and
PREMIUM FV x PVOA xx commissions and similar charges.
● When a financial liability is recognized
PERIODIC xx initially, an entity shall measure it at its fair
Without accrued INTEREST x value(issue price) and considering
interest PVSP transaction costs that are directly
Cash xx attributable to the issue of the financial
ISSUE PRICE xx
liability.
B/P xx
 CARRYING VALUE OF BONDS PAYABLE (B) (A)

Carrying value, end = Carrying value, end =

⬋ ⬊ Bond carrying value, beg Bond carrying value, beg
↓ PREMIUM ON B/P ↑ DISCOUNT ON B/P of period - premium of period + discount
↓ ↓ amortization for the amortization for the
Premium on B/P xx Discount on B/P xx period period
Cash xx Cash xx

CARRYING VALUE OF BONDS

PAYABLE
EFFECTIVE INTEREST METHOD
● Under the effective interest method, a PREMIUM
constant interest rate based on the DATE NOMINA EFFECTI AMORTIZA CV OF
beginning of the period carrying the amount L VE TION OF BONDS
INTERES INTERES PREMIUM (CV OF
of the bonds is recognized as interest T T (Nominal BP -
expense each period, resulting in unequal (FV x NR) (CV of interest - Amortiza
recorded amounts of interest expense. bonds x effective tion of
● The effective interest method provides an effective interest) premium
rate)
increasing premium or discount
amortization each period. xx xx xx xx
● Trends using the effective interest method
when bonds are sold at discount:
➔ Interest expense increases each Face value xx
period, because the carrying value
also increases as the discount is
Premium on B/P xx
amortized.
➔ The amount of the discount CV OF B/P xx
amortization increases each period
as the difference between the
nominal interest and the effective DISCOUNT
interest becomes wider. DATE NOMINA EFFECTI AMORTIZA CV OF
● Trends using the effective interest method L VE TION OF BONDS
when bonds are sold at premium: INTERES INTERES DISCOUNT (CV OF
T T (Nominal BP +
➔ Interest expense decreases each (FV x NR) (CV of interest - Amortiza
period, because the carrying value bonds x effective tion of
also decreases as the premium is effective interest) discount
amortized. rate)
➔ The amount of the premium xx xx xx xx
amortization increases each period
as the difference between the
nominal interest and the effective Face value xx
interest becomes wider. each
period
Discount on B/P (xx)
ILLUSTRATION FOR EFFECTIVE
CV OF B/P xx
INTEREST METHOD OF AMORTIZATION
PREMIUM DISCOUNT FREQUENTLY ASKED QUESTIONS
SCENARIO SCENARIO ● How much is the issue price of the bonds?
● How much is the Interest expense?
NOMINAL INTEREST = NOMINAL INTEREST =
● How much is the Amortization of Premium
FV x semi-annual FV x semi-annual
interest rate interest rate
or Discount?
● How much is the Discount on Bonds
EFFECTIVE INTEREST EFFECTIVE INTEREST Payable at the balance sheet date?
= Bond carrying value, = Bond carrying value, ● How much is the Premium on Bonds
beg of period x semi- beg of period x semi- payable at the balance sheet date?
annual market rate annual market rate ● How much is the Carrying value of the
bonds at the balance sheet date?
PREMIUM DISCOUNT
AMORTIZATION = (A) - AMORTIZATION = (B) -
 ● How much is the Interest payable/accrued 12/31 800,000 651,679 148,321 8,000,000
Interest at the balance sheet date? 0, if the /24
balance sheet date = interest payment date
DEC. 31, 2024
ILLUSTRATION (TERM BONDS)
On January 1, 2020, Poseidon Company issued a Bonds payable 8,000,000
5-year, P8,000,000 bonds with a stated interest
rate of 10% payable every December 31. The Cash 8,000,000
bonds were acquired to yield 8%. (Premium)
2. Prepare the JE to record the nominal interest for
Annual nominal interest = 8,000,000 x .10 = the year 2020.
800,000
Interest expense 800,000
Present value factors are: Cash 800,000
PV of an annuity of 1 for 5 periods at 8% - 3.99937
PV of 1 for 5 PERIODS AT 8% .6806
PVOA of 1 for 10 periods at 10% 3.7908 3. Prepare the JE to record the amortization of the
PV of 1 for 10 periods at 10% .62209 premium for the year 2020.

1. How much is the issue price of the bonds? Premium on B/P 108,883

Interest expense 108,883

Present value of FACE VALUE 5,444,800
(FV x PVSP)
(8,000,000 x .6806) 4. How much is the unamortized premium on
bonds payable at December 31, 2020 and
Present value of INTEREST 3,194,160
December 31, 2021?
(PERIODIC INTEREST x PVOA)
(800,000 x 3.9927)
Premium on B/P, 1/1/20 638,960
ISSUE PRICE, 1/1/20 8,638,960
Amortization of premium-2020 (108,883)

Cash 8,638,960 Premium on B/P, 12/31/20 530,077

B/P 8,000,000
Premium on B/P, 1/1/20 638,960
Premium on B/P 638,960
Amortization of premium-2020 (108,883)

Amortization of premium-2021 (117,5949

DATE NOMINA EFFECTI AMORTIZ CV OF
L VE ATION OF BONDS Premium on B/P, 12/31/21 412,483
INTERES INTERES PREMIUM (CV OF
T T (Nominal BP -
(FV x NR) (CV of interest - AMORT. 5. How much is the interest expense for the years
bonds x effective OF 2020 and 2021? Int. exp. = CV of bonds x ER
effective interest) PREMIU INTEREST EXPENSE (2020): 8,638,960 x 8% x
rate) M) 12/12/ = 691,117
1/1/2 - - - 8,638,960
INTEREST EXPENSE (2021): 8,530,077 x 8% x
0 12/12= 682,406

12/31 800,000 691,117 108,883 8,530,077 6. How much is the carrying value of bonds
/20 payable on December 31, 2020 and December 31,
12/31 800,000 682,406 117,594 8,412,483
2021?
/21
Face value, 12/31/20 8,000,000
12/31 800,000 672,999 127,001 8,285,482
/22
Premium on B/P, 12/31/20 530,077
12/31 800,000 662,839 137,161 8,148,321
/23 CV of B/P, 12/31/20 8,530,077
 Face value, 12/31/21 8,000,000 7/1/2 240,000 263,297 23,297 3,784,682
1
Premium on B/P, 12/31/20 412,483
1/1/2 240,000 263,297 24,928 3,809,610
CV of B/P, 12/31/21 8,412,483 2

7/1/2 240,000 266,673 26,673 3,836,283

ILLUSTRATION (TERM BONDS) 2
On January 1, 2020, Zeus Company issued a 1/1/2 240,000 268,540 28,540 3,864,823
P4,000,000 of 12% bonds to yield 14%. Interest is 3
payable semi-annually on January 1 and July 1.
The bonds mature in five years. Zeus Company 7/1/2 240,000 269,538 30,538 3,895,361
uses the calendar year and the effective interest 3
method of amortization. 1/1/2 240,000 272,675 32,675 3,928,036
4
Semi-annual nominal interest = 4,000,000 x .06 =
240,000 7/1/2 240,000 274,963 34,963 3,962,999
4
Present value factors are: 1/1/2 240,000 277,410 37,001 4,000,000
PV of an annuity of 1 for 5 periods at 14% - 3.4331 5 37,410
PV of 1 for 5 periods at 14% .5194
PV of an ord. of 1 for 10 periods at 7% 7.0236
PV of 1 for 10 periods at 7% .5084 JAN. 1, 2025
Bonds payable 4,000,000
1. How much is the issue price of the bonds?
Cash 4,000,000

Present value of FACE VALUE 2,033,600

(FV x PVSP) 2. Prepare the JE to record the nominal interest for
(4,000,000 x .5084) the year 2020.
JULY 1, 2020
Present value of INTEREST 1,685,664
(PERIODIC INTEREST x PVOA) Interest expense 240,000
(240,000 x 7.0236)
Cash 240,000
ISSUE PRICE, 1/1/20 3,719,264 DECEMBER 31, 2020
Interest expense 240,000
Jan. 1, 2020
Cash 3,719,264 Cash 240,000

Discount on B/P 280,736 3. Prepare the JE to record the amortization of the

premium for the year 2020.
B/P 4,000,000
JULY 1, 2020
Interest expense 20,348
DATE NOMINA EFFECTI AMORTIZ CV OF
L VE ATION BONDS Discount on B/P 20,348
INTERES INTERES OF (CV OF BP
T T DISCOU + AMORT. DECEMBER 31, 2020
(FV x NR) (CV of NT OF
bonds x (Nominal DISCOUNT Interest expense 21,773
effective interest - )
rate) effective Discount on B/P 21,773
interest)
6% 7%
Discount on B/P, 1/1/20 638,960
1/1/2 - - - 3,719,264
0 Amortization of discount-2020 (42,121)
(20,348 + 21,773)
7/1/2 240,000 260,348 20,348 3,739,612
0
Discount on B/P, 12/31/20 238,615
1/1/2 240,000 261,773 21,773 3,761,385
1
 Discount on B/P, 1/1/20 638,960
1. How much is the issue price of the bonds?

Amortization of discount-202 (42,121) FV x PVOA xx

Amortization of discount-2021 (48,225) PERIODIC INTEREST xx
(23,297 + 24,928)
x PVSP
Discount on B/P, 12/31/20 190,390
ISSUE PRICE xx

4. How much is the unamortized premium on

bonds payable at December 31, 2020 and 1,000,000 x 2.49 2,490,000
December 31, 2021?
360,000 x .91 327,600

12/31/20 12/31/21 240,000 x .83 199,200

FACE VALUE 4,000,000 4,000,000 120,000 x .75 90,000

DISCOUNT ON B/P (238,615) (190,390) ISSUE PRICE, 1/1/20 3,106,800

CV OF B/P 3,761,385 3,809,610

ALTERNATIVE COMPUTATION:
5. How much is the interest expense for the years FV + PERIODIC xx
2020 and 2021? Int. exp. = CV of bonds x ER INTEREST X PVSP
INTEREST EXPENSE (2020) = 260,348 +
261,773 = 522,121
INTEREST EXPENSE (2021) = 263,297 + 2020 1,000,00 360,000 1,360,000
264,928 = 528,225 0 (3,000,000 x 12%)
6. How much is the carrying value of bonds 2021 1,000,00 240,000 1,240,000
payable on December 31, 2020 and December 31, 0 (2,000,000 x 12%)
2021?
2022 1,000,00 120,000 1,120,000
0 (1,000,000 x 12%)
FACE VALUE, 12/31/20 4,000,000

DISCOUNT O B/P, 12/31/20 (238,615)

1,360,000 x .91 1,237,600
CV OF B/P, 12/31/20 3,761,385
1,240,000 x .83 1,029,200

1,120,000 x .75 840,000

FACE VALUE, 12/31/21 4,000,000 ISSUE PRICE, 1/1/20 3,106,800
DISCOUNT O B/P, 12/31/21 (190,390)
JAN 1,2020
CV OF B/P, 12/31/21 3,809,610
Cash 3,106,800

ILLUSTRATION (SERIAL BONDS) B/P 3,000,000

On January 1, 2020, Skycastle Company issued
serial bonds with face value of P3,000,000 and a Premium on B/P 106,800
stated rate of 12% payable annually every
December 31. The bond has a price that yields 2. Prepare the JE to record the nominal interest for
10%. The bonds mature at an annual installment the year 2020.
of P1,000,000 every December 31. The present
value of 1 at 10% for one period is 0.91; for two
periods is 0.83 and for three periods is 0.75. The DATE NOMINA EFFECTI AMORTIZ CV OF
L VE ATION BONDS
present value of an ordinary annuity of 1 at5 10% INTERES INTERES OF (CV OF BP
for 3 periods is 2.49. T T DISCOU + AMORT.
(FV x NR) (CV of NT OF
bonds x (Nominal DISCOUNT
effective interest - )
rate)
 effective FV, 12/31/20 1,000,000
6% 7% interest) (2,000,000 -
1/1/2 - - - 3,106,8004 1,000,000)
0

12/31 1,000,000 360,000 49,320 2,057,480 PREMIUM ON B/P, 23, 228

/20 12/31/21
12/31 1,000,000 240,000 34,252 1,023,28 CV OF BONDS 1,023, 228
/21
PAYABLE, 12/31/20
12/31 1,000,000 96,772 23,228 0
/22
COMPOUND FINANCIAL INSTRUMENT
● BONDS WITH WARRANTS
DEC 31, 2020 ➔ Bondholders are given the right to
Bonds payable 1,000,000 acquire a specified number of
ordinary res of the issuing
Cash 1,000,000 corporation at a GIVEN PRICE
within a certain time period.
➔ EQUITY component = SHARE
Interest expense 360,000
WARRANTS OUTSTANDING
Cash 360,000 (SWO)
● CONVERTIBLE BONDS
➔ Bondholders are given the right to
3. Prepare the JE to record the amortization of EXCHANGE their bond holding into
premium for the year 2020. ordinary shares or other securities
of the issuing company within a
Premium on bonds 49,320 specified period of time.
payable ➔ EQUITY component = SHARE
PREMIUM - BOND CONVERSION
Interest expense 49,320
PRIVILEGE (BCP)
➔ Convertible bonds give the holders
4. How much is the interest expense for the years thereof the right to exchange their
2020 and 2021? INTEREST EXPENSE = CV of bondholding into ordinary shares or
Bonds x Effective rate other securities of the issuing
company within a specified period
INTEREST EXPENSE (2020): 360,000 of time.
INTEREST EXPENSE(2021): 240,000
ISSUE PRICE
bifurcation
5. How much is the carrying value of bonds
payable on December 31, 2020 and December 21, ⬋ ⬊
2021? LIABILITY EQUITY
↓ ↓
(without) (residual amount)
FV, 12/31/20 2,000,000
↓ ↓
(3,000,000 -
★ Total Amount ★ SWO (bonds with
1,000,000)
★ Quoted Price WARRANTS)
→ FV x Quoted price ★ BCP (convertible
PREMIUM ON B/P, 57,480
→ Ex. 101.105, 95, 98 bonds)
12/31/20
★ Effective Rate (PV of
FV+ PV of Periodic
CV OF BONDS 2,057,480
Interest)
PAYABLE, 12/31/20
 ISSUANCE OF BONDS Ordinary share (par or stated value) xx

Share premium-ordinary xx
★ BONDS WITH WARRANTS

EXERCISE CONVERSION
WARRANTS BONDS
PREMIUM DISCOUNT
CASH ↑ 𝖷
Cash xx Cash xx
CV OF B/P 𝖷 ↓
B/P xx Discount on xx
B/P
Premium on xx
SWO/SP-BCP ↓ ↓
B/P
B/P xx ORDINARY ↑ ↑
Share xx SHARE
warrants Share xx CAPITAL
outstanding Warrants
outstanding SP-ORDINARY ↑ ↑
★ CONVERTIBLE BONDS
RETIREMENT OF BONDS
● The issuing corporation may retire bonds at
maturity date or before the maturity date
PREMIUM DISCOUNT either by redeeming the bonds or
repurchasing them in the open market.
Cash xx Cash xx ● If bonds are retired at their maturity date,
any premium or discount will have been
B/P xx Discount on xx completely amortized.
B/P
● The retirement is recorded as an ordinary
Prem.on B/P xx
payment of debt, and no gain or loss is
Sp-Bond xx B/P xx recognized upon retirement on maturity
conversion date.
Sp-Bond xx
privilege
conversion
● When bonds are retired before maturity
privilege date, the ff. must be observed:
➔ The amortization of premium or
discount must be updated to
determine
★ EXERCISE WARRANTS
➔ Any accrued interest on the retired
bonds from the recent interest
Cash xx payment date up date of retirement
must be recorded and paid.
Share warrants outstanding xx RETIREMENT OF BONDS

Ordinary share (par or stated value) xx

★ BONDS WITHOUT ★ BONDS WITH
Share premium-ordinary EQUITY COMPONENT EQUITY
xx
→ No bifurcation COMPONENT(i.e.
→ Gain or loss on convertible bonds)
retirement (Liability) → → Bifurcation
★ CONVERSION BONDS P/L → Gain or loss on
Retirement
★ LIABILITY → P/L
Bonds payable xx
★ EQUITY → Share
premium-unexercised
Premium on Bonds payable xx BCP

SP-Bond conversion privilege xx

Discount on Bonds payable xx

 DATE OF RETIREMENT ISSUE PRICE
(Date of Issuance)

⬋ ⬊ ⬋ ⬊
Before maturity date On maturity date LIABILITY EQUITY
↓ ↓ ↓ ↓
★ Gain or loss on ★ No gain or loss on (without) (residual amount)
retirement retirement ↓ ↓
→ Retirement price < → Retirement price = ★ Total Amount ★ BCP (convertible
or > CV of Bonds CV of Bonds payable ★ Quoted Price bonds)
payable → FV x Quoted price
→ GAIN = RP < CV → Ex. 101.105, 95, 98
→ GAIN = RP > CV
★ Effective Rate (PV of
FV+ PV of Periodic
Interest)
GAIN OR LOSS ON RETIREMENT OF BONDS
WITHOUT EQUITY COMPONENT
GAIN OR LOSS ON RETIREMENT OF
CONVERTIBLE BONDS
LIABILITY (B/P)
LIABILITY EQUITY (SP-
RETIREMENT PRICE xx
(B/P) BCP)
(RP)
RETIREMENT xx xx
CARRYING VALUE (CV) (xx)
PRICE (RP)
GAIN OR LOSS xx → P/L
CARRYING (xx) (xx)
VALUE (CV)
JOURNAL ENTRIES:
GAIN OR xx → P/L xx → EQUITY
Bonds payable xx LOSS

Premium on Bonds payable xx Bonds payable xx

Loss on retirement of bonds (RP > CV) xx
Premium on Bonds payable xx
Discount on Bonds payable xx
Loss on retirement of bonds (RP > CV) xx
Cash (Total Retirement Price) xx
SP-Bond Conversion privilege xx
Gain on retirement of bonds xx
SP-Unexercised on BCP or Retained xx
earnings (RP > CV)

RETIREMENT OF CONVERTIBLE BONDS Discount on Bonds payable xx

Cash (Total Retirement Price) xx

★ BONDS WITHOUT ★ BONDS WITH
EQUITY COMPONENT EQUITY Gain on retirement of bonds (RP < CV) xx
→ No bifurcation COMPONENT(i.e.
→ Gain or loss on convertible bonds) SP-Unexercised BCP (RP<CV) xx
retirement (Liability) → → Bifurcation
P/L → Gain or loss on
Retirement DEBT RESTRUCTURING
★ LIABILITY → P/L ● During periods of depressed economic
★ EQUITY → Share conditions, some debtors experience
premium-unexercised difficulty in meeting their maturing
BCP obligations. For this reason, the creditor
may grant concession to the debtor that it
would not otherwise grant under normal
conditions.
● A troubled debt restructuring involves one
of three forms:
 ➔ Asset swap
➔ Equity swap
➔ Modification of debt terms

ASSET SWAP
● CV of LIABILITY → GAIN on DEBT
RESTRUCTURING (P/L)
● FAIR VALUE of ASSET GIVEN UP →
GAIN on DEBT RESTRUCTURING (P/L)
● CV of ASSET GIVEN UP → GAIN OR
LOSS on DISPOSAL/EXCHANGE/SALE
(P/L)
EQUITY SWAP
● CV of LIABILITY → GAIN on debt
RESTRUCTURING (P/L)
● SHARES ISSUED/FAIR VALUE of
LIABILITY SETTLED → GAIN on debt
RESTRUCTURING (P/L)
● PAR VALUE OF SHARES ISSUED →
SHARE PREMIUM (EQUITY)

MODIFICATION OF DEBT TERMS

Carrying value of OLD LIABILITY xx

PV of Restructured Future Cash xx**

Outflows

Difference xx

**Present value of FACE VALUE xx

Present value of INTEREST xx

PV of Restructured Future Cash xx

Outflows
*using ORIGINAL EFFECTIVE RATE

DIFFERENCE

⬋ ⬊
With Substantial Without Substantial
Modification of Terms Modification of Terms
↓ ↓
At least 10% of the CV of Less than 10% of the CV
Old liability of Old liability