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COM
 Reminder!
INTRODUCTION When the bonds are sold CHECK LIST
PFRS 9 requires that at a discount, the effective
discount on bonds rate is higher than the Known as scientific
method or simply
payable, premium on nominal rate. interest method

bonds payable and bond Nominal rate is the

coupon or stated rate
issue cost shall be
amortized using the When the bonds are sold Effective rate is the
effective interest method. at a premium the effective yield or market rate

rate is lower than the

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nominal rate.
 EFFECTIVE AMORTIZATION OF
DISCOUNT
On January 1, 2020, an entity issued
two-year 8% bonds with face amount
of P1,000,000 for P964,540, a price
which will yield a 10% effective
interest cost per year. Interest is
payable semiannually on June 30 and
December 31.
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 Journal Entries for 2020
Jan 1 Cash 964,540

Discount on bonds payable 35,460

Bonds payable 1,000,000

June 30 Interest expense 48,227

Cash 40,000

Discount on bonds payable 8,227

Dec 31 Interest expense 48,638

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Cash 40,000

Discount on bonds payable 8,638

 EFFECTIVE AMORTIZATION OF
PREMIUM
On January 1, 2020, an entity issued
three-year 12% bonds with face
amount of P1,000,000 for P1,049,740
a price which will yield a 10% effective
interest cost per year. Interest is
payable annually every December 31.
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 Journal Entries for 2020
Jan 1 Cash 1,049,740

Bonds payable 1,000,000

Premium on bonds payable 49,740

Dec 31 Interest expense 104,974

Premium on bonds payable 15,026

Cash 120,000
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 The market price of issue
price of bond payable is
equal to the present value
Market of the principal bond
liability plus the present
price value of future interest
payments using the
effective or market rate of
interest.
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 ILLUSTRATION
Face amount of bonds 4M

Nominal rate 6%

Effective rate 8%

The bonds are issued on January 1, 2020 and mature in four years on
January 1, 2024. The interest in payable annually every December 31.

PV of 1 at 8% for 4 periods .7350

PV of an ordinary annuity of 1 at 8% for 4 periods 3.3121

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 Computation for PV of bonds
PV of principal (4M x .7350) 2,940,000
PV of annual interest payments Table of Amortization
(240,000 x 3.3121) 794,904
Total PV 3,734,904 DATE INTEREST INTEREST DISCOUNT CARRYING
PAID EXPENSE AMORTIZATION AMOUNT
1/1/2020 3,734,904
Face amount 4,000,000
12/31/2020 240,000 298,792 58,792 3,793,696
Market price or issue price (3,734,904)
12/31/2021 240,000 303,496 63,496 3,857,192
Discount on Bonds Payable 265,096
12/31/2022 240,000 308,575 68,575 3,925,767

12/31/2023 240,000 314,233 74,233 4,000,000

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 Effective interest method-bond issue cost
PFRS 9 provides that “transaction cost” that are
directly attributable to the issue of financial liability
shall be included in the initial measurement of
financial liability.
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― Irene M. Pepperberg
 ILLUSTRATION 1-Discount and bond issue cost
On January 1, 2020, an entity issued three-year bonds with face amount of P10M
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.

Face amount 10,000,000

Discount on bonds payable (248,790)

Issue price 9,751,210

Bond issue cost (239,880)

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Net proceeds P9,551,330

 ILLUSTRATION 2- Premium and bond issue cost
On January 1, 2020, an entity issued five-year bonds with face amount of P10M 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 P200,000.

Face amount 10,000,000

Premiun on bonds payable 500,000

Issue price (10M x 105) 10,500,000

Bond issue cost (200,000)

Net proceeds P10,300,000

Cash 10,300,000

Bonds payable 10,000,000

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Premium on bonds payable 300,000