Payment stage

Files

Unit/Module Bonds Payable

Week Week 6

Interest Payable
Approaches in Accounting for Bonds

 Memorandum Approach No entry)

 Journal entry approach

Authorization
Unissued bonds payable xxx
Authorized bonds payable xxx

Issuance
Cash xxx
Unissued bonds payable xxx

Retirement on Maturity Date

 Payment of bonds maybe on maturity date or earlier than maturity date in the
case of callable bonds

 If the payment is made on maturity date, the company will have to pay the
maturity value MV, that is the principal amount

 At maturity date the premium and discount is fully amortized, thus, the
carrying amount of the bonds is equal to the principal amount

Payment stage 1
  Since the payment is equal to the carrying amount, no gain or loss is recorded

Retirement in Advance
 If the payment is made on in advance, the company will have to pay the fair
value FV of the bonds at the date of payment

 At the retirement date the premium and discount is not fully amortized, thus,
the carrying amount CA of the bonds is not equal to the principal amount

 Since the payment (a.k.a retirement price) is equal to FV and the CA is equal
to amortized cost. The difference is recorded as gain or loss on retirement.

Step By Step Procedure

 Retirement price of the bonds payable + Interest payable Unpaid)

 Carrying amount of the bonds Amortized cost)

 Gain or loss on retirement

Step 1 Allocate the retirement price to: 1 retirement price and 2 retirement
of interest payable

To compute Retirement of Interest:

Principal retired bonds xx

Nominal interest rate x%

Months paid xx/12

Retirement of interest xx

Yung matitira yun yung retirement price of bonds

Interest payable retired

Principal amount (retired portion) xx

Payment stage 2
 Times: nominal interest rate x%
Times: months interest unpaid x/12

Retirement of interest payable xx

Illustration:
Computation of Total Retirement Price

On December 31, 2019, the liability section of Philies Company's statement of

financial position included bonds payabale of P10 million and unamortized
premium on bonds payable of P180,000. Further verification revealed that these
bonds were issued on December 31, 2017.

Interest at 12% is payable every June 30 and December 31. On April 1, 2020,
Philies retired P4,000,000 of these bonds at 97 plus accrued interest .

How much was the total amount of cash paid for the retirement of bonds on April
1, 2020? 4,000,000

Solution:
Face amount of bonds payable = P10 million

Nominal interest rate = 12%

Retired bonds = 4,000,000

Principal amount (retired portion) 4,000,000

Nominal interest rate 12%

Months interest unpaid 3/12

Retirement of interest 120,000

Total retirement price 4,000,000

Payment stage 3
 Retirement price of interest 120,000
Retirement price of bonds 3,880,000

Retirement interest 120,000

Retirement price of bonds 3,880,000

Total retirement price 4,000,000

Step 2 Compute the carrying amount CA of bonds at the retirement date
Full retirement:

Initial measurement xx

Times: 1 + Effective Interest Rate x%

Less: Nominal Interest (xx)

Carrying amount @ retirement xx

Partial retirement:

Initial measurement xx
Times: 1 + Effective Interest rate xx

Less: Nominal Interest (xx)

Carrying amount, @ retirement xx

Times: Portion of bonds retired xx

Carrying amount, retired bonds xx

Gain Loss

Retire price < CA Bonds Retire price > CA Bonds

Payment stage 4
 Carrying amount, retired bonds xx
Less: Retirement price of bonds (xx)

Gain or (loss) on retirement x(x)

Illustration:
Gain or Loss on Retirement - Complete Retirement

The 12% bonds payable of Nyman Company had a carrying amount of P832,000
on December 31, 2021. The bonds, which had a face value of P800,000, were
issued at a premium to yield 10%. Nyman uses the effective-interest method of
amortization.

Interest is paid on June 30 and December 31. On June 30, 2022, several years
before their maturity, Nyman retired the bonds at 104 plus accrued interest.

The loss on retirement is: 6,400

Solution:

Retirement price of bonds 800k x 104% 832,000

Full retirement:

Initial measurement P832,000

Times: 1 + Effective Interest Rate 1.05

Less: Nominal Interest 800k x 12% x 6/12 48,000

Carrying amount @ retirement P825,600

Carrying amount, retired bonds 825,600

Payment stage 5
 Less: Retirement price of bonds 832,000
Gain or (loss) on retirement 6,400

Gain or loss on Retirement - Partial Retirement

What amount of gain or loss on early retirement of bond that will be reported in
2018 income statement? P517,440

Solution:
Total cash paid = P3,120,000

Principal amount = 3,000,000

Principal amount 3,000 x 1,000 3,000,000

Nominal interest rate 12%

Months interest unpaid 5/12

Retirement of interest 150,000

Total retirement price 3,120,000

Retirement price of interest 150,000

Retirement price of bonds 2,970,000

Partial retirement: 2 yr. and 5 months)

Initial measurement 5,851,160

Times: 1 + Effective Interest rate 1.10

Payment stage 6
 Less: Nominal Interest 5M x 12% 600,000

Times: 1 + Effective Interest rate 1.10

Less: Nominal Interest 600,000

Times: 1 + Effective Interest rate 1.04166 ← [(.105/121

Less: Nominal Interest 600k x 5/12 250,000

Carrying amount, @ retirement 5,812,400

Times: Portion of bonds retired 3M/5M 60%

Carrying amount, retired bonds P3,487,440

Carrying amount, retired bonds P3,487,440

Less: Retirement price of bonds 2,970,000

Gain or (loss) on retirement P517,440

Journal Entry:

Bonds Payable 3,000,000

Premium 487,440

Interest payable 150,000

Cash 3,120,000
Gain on retirement 517,440

Treasury Bonds
Issued and reacquired but not cancelled)

Same accounting procedure as retirement in advanced

Payment stage 7
 Journal Entry Cancelled):

Bonds Payable 3,000,000

Premium 487,440
Interest payable 150,000

Cash 3,120,000
Gain on retirement 517,440

Journal Entry Not Cancelled):

Treasury Bonds 3,000,000

Premium 487,440
Interest payable 150,000
Cash 3,120,000

Gain on retirement 517,440

Journal Entry If Cancelled):

Bonds payable 3,000,000
Treasury bonds 3,000,000

When subsequently sold, same accounting procedure as bonds orignally

issued
If solf at P3.5M

Journal entry:
Cash 3,500,000
Treasury bonds 3,000,000

Premium 500,000

Payment stage 8
 Straight Line Amortization
Step by step procedure)

 Total Premium or Discount

Initial measurement FV - TC or PV of CF xx

Less: Face amount (xx)

Total premium or discount xx
2. Periodic Amortization

Total premium or discount = Annual amortization

Term of the bonds

Interest Expense
Nominal Interest Face*NR xx

Less: Amortization of premium (xx)

Add: Amortization of discount xx
Interest expense xx

Carrying Amount
Carrying amount - beginning xx
Less: Amortization of premium (xx)
Add: Amortization of discount xx

Carrying amount - ending xx

Payment stage 9
 Illustration:

On January 1, 2022, Marimar Company issued 10,000 of its 12%, P1,000 face value
5-year bonds at 105. Interest on the bonds is payable annually every December
31. In connection with the sale of these bonds, Marimar paid the following
expenses:

Promotion costs 100,000

Engraving and printing 400,000

Underwriter's commission 500,000

Using the straight line method, what amount should Marimar report as bond
interest expense for the year 2022? P1,300,000

Solution:

 Total Premium or Discount

Initial measurement 10M x 105% - 1M 9,500,000

Less: Face amount 10,000,000

Total premium or discount 500,000

2. Periodic Amortization

500,000 = 100,000 per year

5

Interest Expense
Nominal Interest 10M*12% 1,200,000

Less: Amortization of premium 0

Add: Amortization of discount 100,000

Payment stage 10
 Interest expense 1,300,000

Carrying Amount
Carrying amount - beginning 9,500,000

Less: Amortization of premium 0

Add: Amortization of discount 100,000
Carrying amount - ending 9,600,000

Straight Line Amortization - Retirement

Sanji, Inc. issued P100,000 of its 8%, five year bond on January 1, 2015, at 98 .

Interest is paid on January 1 and July 1. The bonds are callable at 103 and straight
line amortization is used. The bonds are recallable on April 1, 2017.

The journal entry to record the reacquisition of the bonds will include a:

Credit Discount on Bonds Payable P1,100

Dr. Bonds Payable P100,000

Dr. Loss 4,100
Cr. Cash P103,000

Cr. Discount 100,000 - 98,900 1,100

Solution:

 Total Premium or Discount

Initial measurement 100,000 x 98% 98,000

Less: Face amount 100,000

Total premium or discount 2,000

Payment stage 11
 2. Periodic Amortization

2,000 = P33.33 per month

60 months

Interest Expense
Nominal Interest 100K*8% 8,000

Less: Amortization of premium 0

Add: Amortization of discount 33.33 x 12 400
Interest expense 8,400

Carrying Amount
Carrying amount - beginning 98,000
Less: Amortization of premium 0
Add: Amortization of discount 33.33 x 27 mo) 900

Carrying amount - ending 98,900

Carrying amount, retired bonds P98,900

Less: Retirement price of bonds 103,000 ← 100,000 x
103%
Gain or (loss) on retirement P4,100

Bond Outstanding Method

Applicable to serial bonds)

Illustration:

Payment stage 12
 On January 1, 2021, Dada Company received P5,300,000 for P5,000,000 face
amount, 12% bonds, interest is payable semi-annually every June 30 and
December 31. The bonds mature at a rate of P1,000,000 every December 31 of
each year.

Payment stage 13