Bonds Payable
Definition Life of Bond has 3 stages
Bonds payable - A contract of debt between
1. Issuance Stage
two parties, the debtor borrower) and investor
2. FS preparation
(lender). Generally, bonds payable is a long
3. Payment Stage
term liability and incur periodic interest.
Bonds vs other long terms
Notes Payable Loans payable Bonds Payable
Issues or Promissory note Promissory Note Indenture Bond Certificate
documented by
To Seller of Goods or Bank (Financial General Investing Public *
Services Institution)
In exchange of Goods Services PPE Cash Cash
*Look for companies with excess funds that’s willing to invest. Such companies don’t see their
loan to you as loans or
receivable but rather an
investment. Commonly, you
transact an underwriter, is the
agent that serves as your bridge
to the general investing public.
They’re the ones that looks for
companies who wants to invest.
Classification of Bonds
As To Principal Payment
1. Term Bonds- An issue
of bonds that mature at the same time; lump-sump payment
2. Serial bond –matures in portions over several different dates; installment
As to security
1. Secured Bonds- Bonds payable with collateral; has security in case one can’t or will
not pay the payables; usually required for companies with low credit ratings .
If secured by Then classify as
Real Property Mortgage Bond Payable
Investment (like shares) Collateral Bonds Payable
Personal Property (moveables) Chattel Mortgage Payable
2. Unsecured Bonds (aka Debenture)- Bonds without Collateral
As to holder
1. Registered Bonds- the Bond Holder is registered in the company’s book and known to
the company.
Bonds Payable, unlike other liabilities, is seen as an investment in the eyes of the
creditor and it is transferrable and can be sold to other investors.
For registered bonds, it is required for the holder to register so that the payee will
know who to pay or who’s the current owner.
2. Bearer Bonds
Gives the interest to an underwriter and he/she will give that to the creditor.
Other classification
Convertible bonds - gives the holder the right to convert their right from receiving the
principal and interest into receiving ownership share from the issuing company.
Callable bonds - gives the holder the right to pay the principal in advance (ahead of maturity
date.)
Guaranteed bonds - gives the holder the right to collect from a guarantor if the issuing
company failed to pay.
Junk bonds - bonds issued by a company with low credit standing but issued at a high
interest rate.
Exercises
Anything violet means solution or explanation
Bonds Payable Classification - Term vs. Serial
1) IT Corporation December 31, 2019 balance sheet contained the following items in the
long-term liabilities section:
Classification
9.25% registered debentures. callable in 11 years, 700 000 Term (if silent term bonds) also
due in 16 years registered, debenture and callable
925% collateral trust bonds, convertible into 600 000 Term, secured bond, convertible
common stock beginning in 2028. due in 19 years bond
10% subordinated debentures (P30.000 maturing 800 000 Serial bonds, debenture
annually beginning in 2020)
What is the total amount of ITS term bonds?
A. 600 000
B. 700 000
C. 1000000
D. 1 300 000
Answer: D
Bonds Payable Classification - Secured vs. Unsecured
2) IT Corporation December 31. 2018 balance sheet contained the following items in the lon
g-lerm liabilities section:
Classification
10% registered bonds, callable in 2019. due in 2028, 3000000 Secured , chattel mortgage
secured by machinery bond
11% bonds. convertible into common stock 5000000 Secured , mortgage bond
beginning in 2018, due in 2025, secured by realty
12% collateral trust bonds P50.000 maturing 7000000 Secured , investment
annually
What are the total amounts of IT’s secured bonds?
A. 15 000 000
B. 12 000 000
C.10 000 000
D. 8 000 000
Answer: A
Initial Measurement of Bonds Payable
Method 1
FORMULA
Fair Value of Bonds Pxx Fair Value=Issue Price=Market Price=Cash Receipt
Less: Transaction Cost (xx) Payment for services related to issuance of bonds such as
Commission fee, Underwriter’s fee, Agent fee, Legal fee,
Accounting fee, Documentary Stamp Tax (DST)
Initial Measurement Pxx
If CASH
Exactly on interest date: Issue Price=FV of Bonds
If issued between interest dates: Issue Price = FV of Bonds
Interest receivable sold
ACCRUED INTEREST
Initial Measurement- Bonds Sold with Accrued Interest
6) May 1, 2019, Raiders Company issued P2.000.0DO. 10 years, 9% bonds at 105 including accrued
interest. These bonds are dated January 1, 2019. Interest is payable semi-annually on January 1 and July
1. Transaction costs of P10,000 warn paid by Raiders.
What is the carrying amount of bonds payable on May 1. 2019?
A. 2.090.000
B. 2.030.000
C. 2.150.000
D. 2.160.000
Answer: B
Solution:
Issue Price(Including Interest) Xx 2100000 2 000 000 x 1.05
Interest receivable sold (xx) (60000)
Fair Value of Bonds Pxx (2040000)
Less: Transaction Cost (xx) (10000)
Initial Measurement Pxx 2030000
Method 2 -Do this if Fair Value is not given
Amount x PV Factor (Orig ER) = PV Amount
Principal xx x xx = xx
Nominal Interest xx x xx = xx
PV of Cashflow (IM) xx
To compute the Present Value of the Principal and Interest, get first the PV Factor using the
EFFECTIVE INTEREST RATE
PV of 1 One-time payment
Also used if series of payment but unequal
Use PV of 1 on each year
PV of Ordinary Annuity Series of payment (equal payments)
First Payment after one period
PV of Annuity Due Series of payment (equal payment)
First payment made immediately
PRINCIPAL
If Term Bond Whole x PV of 1 = xx
principal
If Serial bond Principal PER x PV of annuity = xx
installment
Nominal Interest per period
Term Bond Face amount x x PV of annuity = xx
Serial bond Nominal x PV of 1 (each interest) = xx
interest rate
IF INTEREST IS PAYABLE SEMI ANNUALLY,
EFFECTIVE RATE IS DIVDED BY 2
NUMBER OF PERIODS IS TIMES 2
Initial Measurement - FV of Term Bonds, Annual Interest
3) Ava Company issued 10-year bonds payable with face amount of P4 000 000 on January 1.
2023. The interest is payable annually on December 31 at the 6% stated interest rate. The
bonds were issued to yield 9%.
present value of 1 at 6% for 10 periods is 0.56
present value of an ordinary annuity of 1 at 6% for to periods is 7.36.
present value of 1 at 9% for 10 periods is 0.42
present value of an ordinary annuity of 1 at 9% for 10 periods is 6.42.
What is the market price of the bonds on January 1, 2023?
A. 1.680.000
B. 3,991,200
0. 3,220,800
D. 4.000.000 ANSWER: D
SOLUTION:
Since it’s silent, it’s term bonds
Amount x PV Factor (Annuity) = PV Amount
Principal 4000000 x 0.42 = 1680000
Nominal Interest 2400000* x 6.42 = 1540000
PV of Cashflow (IM) 3220800
Face Amount 40000000
X Nominal Int. rate 6%
Nominal Interest 240000
Initial Measurement - FV of Term Bonds, Semi Annual Interest
4) Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January
1. 2022. The bonds pay Interest semiamually on June 30 and December 31. The bonds are
issued to yield 5%.
Periods PV of 1 at 2.5% PV of Annuity of 1 at 2.5% PV of 1 at 5% PV of 1 at 5%
5 0.884 4.646 0.784 4.330
10 0.781 8.752 0.614 7.722
What are the proceeds form the bond issue?
A. 6,531,618
8. 5,216,494
C. 5,217,800
D. 5,215,050
ANSWER: C
SOLUTION: Use 2.5% because semi-annual
Amount x PV Factor (Orig ER) = PV Amount
Principal 5000000 x 0.781 = 3905000
Nominal Interest 150000* x 8.752 = 1312800
PV of Cashflow (IM) 5217800
Face Amount 5000000 IF INTEREST IS PAYABLE SEMI ANNUALLY,
EFFECTIVE RATE IS DIVIDED BY 2
x Nominal Int. rate 6%
NUMBER OF PERIODS IS TIMES 2
x Semi annual 6/12
Nominal Interest 150000
Initial Measurement - FV of Serial Bonds, Annual Interest
5) Kim Chui Company issued bonds with face amount of P6,000,000 on January 1. 2021. The
nominal rate of 6% is payable annually on December 31. The bonds are issued with an 8%
effective yield. The bonds mature on every December 31 each year at the rate of P2, 000, 000
for the three years.
Present value of 1 at 8%:
One period 0.9259
Two periods 0.8573
Three periods 0.7938
Determine the market price or issue price of the bonds:
A. 5,788,532
8. 5,690,555
0. 4.762.800
D. 5.960.555
ANSWER: A
SOLUTION:
Amount x PV Factor (Orig ER) = PV Amount
Principal 2000000 x 2.5771 = 5154200
Nominal Interest 360000 x 0.9259 = 333324
Nominal Interest 240000 0.8573 = 205752
Nominal Interest 120000 0.7938 = 95256
PV of Cashflow (IM) 5788532
Face Amount x Nominal Rate
Interest 2021 6 000 000 x 6% 360000
Interest 2021 4 000 000 x 6% 240000
Interest 2021 2 000 000 x 6% 120000
