Bonds Payable

Bonds Payable – a contract of debt between two parties, the debtor (borrower) and investor (lender).
Generally, bonds payable is a long term, liability and incur periodic interest.
Notes Payable – Seller of goods or services
Loans Payable – Loans from the bank
Bonds Payable – General investing public
I.
CLASSIFICCATION OF BONDS – AS TO PRINCIPAL PAYMENT
PRINCIPAL PAYMENT
 ONE TIME – TERM BONDS

 SERIES OF PAYMENT – SERIAL BONDS (INSTALLMENT)
CLASSICFICATION OF BONDS – AS TO SECURITY
BONDS PAYABLE WITH COLLATERAL (SECURED BONDS)
 SECURED BY REAL PROPERTY – MORTGAGE BONDS PAYABLE

 SECURED BY INVESTMENT – COLLATERAL BONDS PAYABLE
 SECURED BY PERSONAL INVESTMENT – CHATTEL MORTGAGE BONDS PAYABLE
BONDS PAYABLE WITHOUT COLLATERAL (UNSECURED BONDS; DEBENTURE)
CLASSICFICATION OF BONDS – AS TO HOLDER
REGISTERED BONDS – THE BOND HOLDER IS REGISTERED IN THE COMPANY’S BOOK AND KNOWN TO
THE COMPANY.
BEARER BONDS – THE BOND HOLDER IS NOT REGISTERED IN THE COMPANY’S BOOK AND UNKNOWN
TO THE COMPANY.
OTHER CLASSIFICATIONS
 CONVERTBLE 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.
TERM VS. SERIAL

1. IT Corporation December 31, 2019 balance sheet contained the following items in the long-term liabilities
section:
9.25% registered debentures, callable in 11 years, due in 16 years (TERM) 700,000

9.25% collateral trust bonds, convertible into common stock beginning in 2028, due in 19 years 600,000
(TERM)
10% subordinated debentures (P30,000 maturing annually beginning in 2020) (SERIAL) 300,000
What is the total

amount of IT’s term
bonds? A. 600,000
C. 700,000
B. 1,000,000 D. 1,300,000
SECURED VS. UNSECURED
1. IT Corporation December 31, 2018 balance sheet contained the following items in the long-
term liabilities section: 10% registered bonds, callable in 2019, due in 2023, secured by
machinery 3,000,000
11% bonds, convertible into common stock beginning in 2018, due in 2025, secured by realty
5,000,000
12% collateral trust bonds (SECURED) (P50,000 maturing annually)
7,000,000
What are the total amounts

of IT’s secured bonds? A.
15,000,000
C. 12,000,000
B. 10,000,000 D. 8,000,000
II. INITIAL MEASUREMENT
METHOD 1:
FAIR VALUE OF BONDS XX (ISSUE PRICE / MARKET PRICE / CASH RECEIPT)
MINUS: TRANSACTION COST (XX)
INITIAL MEASUREMENT XX
TRANSACTION COST:
INVESTOR = ADD
DEBTOR = LESS
METHOD 2:
AMOUNT x PV FACTOR = PV AMOUNT
PRINCIPAL XX x XX = XX
NOMINAL INT. XX x XX = XX
PV OF CASHFLOW (IM) = XX
PV FACTOR:
PV OF 1 – ONE TIME PAYMENT
PV OF ORDINARY ANNUITY – SERIES OF PAYMENT, FIRST PAYMENT; AFTER ONE PERIOD
PV OF ANNUITY DUE – SERIES OF PAYMENT, FIRST PAYMENT; MADE IMMEDIATELY
PRINCIPAL: (ORIGINAL EFFECTIVE RATE)
TERM BOND – WHOLE PRINCIPAL
SERIAL BOND – PRINCIPAL PER INSTALLMENT
NOMINAL INTEREST PER PERIOD:
[FACE AMOUNT x NOMINAL INTEREST RATE]
TERM BOND = PV OF ANNUITY (FIXED)
SERIAL BOND = PV OF 1 (EACH INTEREST) (CHANGING)

NOTE:
ORIGINAL EFFECTIVE RATE
 ADJUSTED – PV OF CASHFLOW = INITIAL MEASUREMENT

 UNADJUSTED – PV OF CASHFLOW = FAIR VALUE (LESS: TRANSACTION COST)
IF INTEREST IS PAYABLE SEMI ANNUALLY, EFFECTIVE RATE IS DIVIDED BY 2; NUMBER OF PERIOD IS

TIMES 2
INITIAL MEASUREMENT – FV OF TERM BONDS, ANNUAL INTEREST
1. Ava Company issued 10-year bonds payable with face amount of P4,000,000 on January 1, 2023 (PV OF 1).
The interest is payable annually on December 31 at the 6% stated interest rate (NOMINAL RATE). The
bonds were issued to yield 9% (EFFECTIVE RATE).
The present value of 1 at 6% for 10 periods is 0.56 and the present value of an ordinary annuity of 1 at 6% for
10 periods is 7.36.
(NEVER USE NOMINAL RATE IN COMPUTING PV FACTOR)
The present value of 1 at 9% for 10 periods is 0.42 and the present value of an ordinary annuity of 1 at 9% for
10 periods is 6.42.
(EFFECTIVE RATE SHOULD BE USE IN COMPUTING PV FACTOR)
METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT
METHOD 2:
PRINCIPAL 4,000,000 x 0.42 = 1,680,000

NOMINAL INT. 240,000 x 6.42 = 1,540,800
PV OF CASHFLOW = 3,220,800
NOMINAL INTEREST COMPUTED AS:
FACE AMOUNT
4,000,000
TIMES: NOMINAL INTEREST RATE
6%
NOMINAL INTEREST
240,000
What is the market price of the

bonds on January 1, 2023? A.
1,680,000 C.
3,220,800
B. 3,991,200 D. 4,000,000
INITIAL MEASUREMENT – FV OF TERM BONDS, SEMI ANNUAL INTEREST

1. Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1, 2022. The
bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%.
(EFFECTIVE RATE: ADJUSTED)
(IF INTEREST IS PAYABLE SEMI ANNUALLY, EFFECTIVE RATE IS DIVIDED BY 2; NUMBER OF PERIOD
IS TIMES 2)
5% (YIELD) / 2 = 2.5; 5 (YEAR BONDS) x 2 = 10
Present value of 1 PV of annuity of Present value of PV of annuity of

Periods at 2.5% 1 at 2.5% 1 at 5% 1 at 5%
5 0.884 4.646 0.784 4.330
10 0.781 8.752 0.614 7.722
METHOD 2:
PRINCIPAL 5,000,000 x 0.781 = 3,905,000

NOMINAL INT. 150,000 x 8.752 = 1,312,800
PV OF CASHFLOW = 5,217,800 (INITIAL

MEASUREMENT)
NORMAL INTEREST COMPUTED AS:
FACE AMOUNT 5,000,000
TIMES: NOMINAL INTEREST RATE 6%
TIMES: SEMI ANNUAL 6/12
NOMINAL INTEREST 150,000
What are the proceeds

from the bond issue?
A. 6,531,618 C. 5,217,800
B. 5,216,494 D. 5,215,050
INITIAL MEASUREMENT – FV OF SERIAL BONDS, ANNUAL INTEREST

2. 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.
3 PERIODS
Present value of 1 at 8%:
One period 0.9259
Two periods 0.8573
Three periods 0.7938
METHOD 2:
PRINCIPAL 2,000,000 x 2.5771 = 5,154,200

NOMINAL INT. 360,000 x 0.9259 = 333,324
NOMINAL INT. 240,000 x 0.8573 = 205,752
NOMINAL INT. 120,000 x 0.7938 = 95,256
PV OF CASHFLOW (IM) = 5,788,352
SERIAL BOND – PRINCIPAL PER INSTALLMENT
INTEREST 2021 (6,000,000 x 6%) = 360,000
INTEREST 2022 (4,000,000 x 6%) = 240,000
INTEREST 2023 (2,000,000 x 6%) = 120,000
Determine the market price or

issue price of the bonds: A.
5,788,532 C.
4,762,800
B. 5,690,555 D. 5,960,555

Bonds Payable

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Bonds Payable – a contract of debt between two parties, the debtor (borrower) and investor (lender).

Notes Payable – Seller of goods or services

Loans Payable – Loans from the bank

Bonds Payable – General investing public

CLASSIFICCATION OF BONDS – AS TO PRINCIPAL PAYMENT

 ONE TIME – TERM BONDS

CLASSICFICATION OF BONDS – AS TO SECURITY

BONDS PAYABLE WITH COLLATERAL (SECURED BONDS)

 SECURED BY REAL PROPERTY – MORTGAGE BONDS PAYABLE

BONDS PAYABLE WITHOUT COLLATERAL (UNSECURED BONDS; DEBENTURE)

CLASSICFICATION OF BONDS – AS TO HOLDER

TERM VS. SERIAL

9.25% registered debentures, callable in 11 years, due in 16 years (TERM) 700,000

What is the total

SECURED VS. UNSECURED

What are the total amounts

FAIR VALUE OF BONDS XX (ISSUE PRICE / MARKET PRICE / CASH RECEIPT)

MINUS: TRANSACTION COST (XX)

AMOUNT x PV FACTOR = PV AMOUNT

PV OF 1 – ONE TIME PAYMENT

PV OF ORDINARY ANNUITY – SERIES OF PAYMENT, FIRST PAYMENT; AFTER ONE PERIOD

PV OF ANNUITY DUE – SERIES OF PAYMENT, FIRST PAYMENT; MADE IMMEDIATELY

PRINCIPAL: (ORIGINAL EFFECTIVE RATE)

TERM BOND – WHOLE PRINCIPAL

SERIAL BOND – PRINCIPAL PER INSTALLMENT

NOMINAL INTEREST PER PERIOD:

[FACE AMOUNT x NOMINAL INTEREST RATE]

TERM BOND = PV OF ANNUITY (FIXED)

SERIAL BOND = PV OF 1 (EACH INTEREST) (CHANGING)

ORIGINAL EFFECTIVE RATE

 ADJUSTED – PV OF CASHFLOW = INITIAL MEASUREMENT

IF INTEREST IS PAYABLE SEMI ANNUALLY, EFFECTIVE RATE IS DIVIDED BY 2; NUMBER OF PERIOD IS

INITIAL MEASUREMENT – FV OF TERM BONDS, ANNUAL INTEREST

(NEVER USE NOMINAL RATE IN COMPUTING PV FACTOR)

(EFFECTIVE RATE SHOULD BE USE IN COMPUTING PV FACTOR)

METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL 4,000,000 x 0.42 = 1,680,000

NOMINAL INTEREST COMPUTED AS:

What is the market price of the

INITIAL MEASUREMENT – FV OF TERM BONDS, SEMI ANNUAL INTEREST

Present value of 1 PV of annuity of Present value of PV of annuity of

METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL 5,000,000 x 0.781 = 3,905,000

PV OF CASHFLOW = 5,217,800 (INITIAL

NORMAL INTEREST COMPUTED AS:

FACE AMOUNT 5,000,000

TIMES: NOMINAL INTEREST RATE 6%

TIMES: SEMI ANNUAL 6/12

NOMINAL INTEREST 150,000

What are the proceeds

INITIAL MEASUREMENT – FV OF SERIAL BONDS, ANNUAL INTEREST

METHOD 1: NO ISSUE PRICE / NO MARKET PRICE / NO FAIR VALUE / NO CASH RECEIPT

AMOUNT x PV FACTOR = PV AMOUNT

PRINCIPAL 2,000,000 x 2.5771 = 5,154,200

NOMINAL INT. 240,000 x 0.8573 = 205,752

NOMINAL INT. 120,000 x 0.7938 = 95,256