BONDS PAYABLE – NOT DESIGNATED AT FVPL

I. SALE OF BONDS
A. DURING THE YEAR
1. SALE
 Check is cash or selling price is different from the face amount
a. At a discount if cash or selling price is lower than the face amount
b. At a premium if cash or selling price is higher than the face amount
 Check date of sale
a. If sold in between interest payment date, include accrued interest as part of
payment to be collected from investor/lender/bondholder (computation from
date of issue up to the immediately next interest payment date)
b. If sold in the same interest payment date, no accrual of interest to be collected
but accrual of interest up to the financial reporting date will be made at yearend
 Check if there is Bond Issue Or Transaction Cost
a. If NOT DESIGNATED at FVPL, add to discount, deduct from premium
b. If DESIGNATED at FVPL, expense outright
2. INTEREST PAYMENT
 Check if payment is at the start of the month or end of the month
 Check frequency and dates of interest payment
 If December 31, no accrual will be recognized since interest will be promptly paid
3. ACCRUAL OF INTEREST
 Accrue if interest payment does not fall on the last day of the accounting period/year
 Accrue from last interest payment date up to the financial reporting date
 If pre-terminated, retired, redeemed, refunded, accrue up to the date of pre-
termination, retirement, redemption or refund.
4. AMORTIZATION OF DISCOUNT OR PREMIUM –
 The life of the bond starts from the date of the bond.
 The actual amortization to be recorded however must start from the issue date of the
bond issue or sale date.
 Therefore, if the sale or issuance of the bond happens after the date of the bond, the
period between the date of the bond and sale date is the expired life/period.
 Hence that expired life/period must be deducted from the life of the bond to come up
with the remaining or unexpired life.
 The remaining or unexpired life must be used as basis for the actual amortization of
the discount from the time the bond was issued or sold up to the maturity or
retirement date
 If TERM BONDS, you may use either
1) STRAIGHT LINE METHOD (only for NOT DESIGNATED as FVPL) to amortize
premium or discount
a. Check on the unexpired life up to the maturity date to be used in amortizing
the premium or discount (use only the unexpired life in amortization)
b. Amortize starting from the Sale or Issue Date (not the date of the bond) using
the remaining or unexpired life up to the Financial Reporting Date (applicable
at the start of the year when bond was issued, then subsequently, full year
amortization and if redeemed or retired up to the retirement date)
c. When pre-terminating, retiring, refunding or redeeming bonds, amortize the
last year from start of the year up to the Retirement or pre-termination Date
(applicable at the year when the bonds are pre-terminated, retired, redeemed,
refunded)
2) EFFECTIVE INTEREST METHOD to amortize premium or discount
a. Check if sold at a discount or premium
b. Compute for the INTEREST EXPENSE by multiplying the effective rate with the
balance of the carrying amount (which is the amount of cash received or
selling price less the amortization of the discount or add premium for the
period).
c. Compute for the INTEREST TO BE PAID by multiplying the nominal rate with
the face amount of the bond
d. Compare the Interest paid with the Interest Expense to get the difference
which is now the amount of the AMORTIZATION OF THE DISCOUNT OR
PREMIUM whichever is applicable.
e. Add the amortization of discount or deduct the amortization of premium
(derived in letter d. above) whichever is applicable to the previous period’s
carrying amount of the bond to derive the current period’s CARRYING
AMOUNT OF THE BOND.
f. Continue computing for the amortization by using the new carrying amount of
the bond for every period and multiply the same with the effective interest
rate.
g. Repeat b to f until the maturity date.
h. Once the life has reached the maturity date, validate the total amount of the
amortization of discount or premium, whichever is applicable, which must be
equal to the difference between the face amount of the bond and the selling
price of the bond or that is the discount or premium whichever is applicable.
3) DISCOUNTING (PRESENT VALUE METHOD) IF MARKET PRICE OF BOND IS USED
 There are two payments recorded namely the period interest payments and
the lump sum principal amount at maturity date.
  The PV of 1 and PV of annuity method are used because periodic payments are
made for interest while principal is paid at the end of the life or at maturity of
the bond.
a. Compute for the present value of the face amount using PV of 1 since the face
amount or principal will be paid lump sum at the maturity date
b. Compute for the present value of the periodic interests using PV of annuity
(means annual or periodic payments) since periodic payments of interest are
made.
c. Get the total of a + b to derive the Total Present Value of the bond (Principal +
Interest)
d. Compare the face amount and the Total PV (letter c)
e. The difference is the discount (because the PV will always be lower than the
face amount)
f. Then amortize the discount by using the table for effective interest method
(from b to h of no. 2) above.

 If SERIAL BONDS, USE EITHER

1) BONDS OUTSTANDING METHOD (Fractional allocation in the amortization using a
diminishing balance of the Bonds Payable) – Chapter 5
 If accounting year and bond issue date or bond year coincide
 Ending Balances (face amount at the start of the year minus principal
payment for each year) of the Bond will be used to allocate the discount
or premium
 If accounting year and bond year do not coincide, the amortization crosses to
the next period because bond year and accounting year are different, then the
amortization for each year will comprise the discount of the previous period
from and the current year’s applicable discount.
 Amortize only to the extent that is applicable to the discount or premium of
the previous year and then amortize for the current year.
2) EFFECTIVE INTEREST USING DISCOUNTING METHOD (Page 201 of Chapter 6 for
the illustration)
 Compute the Present Value of Principal Plus Interest using PV of 1 for each
period since there is the periodic payments represent both the principal and
interest for each year or period.
 The difference between term and serial bonds under the effective interest
period is that term bonds will have periodic payments of interest only and
principal is paid lump sum at the end of the life of the bond or at maturity
 date while in serial bonds, the principal plus the interest are paid periodically
e.g yearly or semi-annually.
 Therefore, the PV of 1 for each period for the total of both the principal and
interest is used for serial bonds rather than both PV of 1 and annuity since
both principal and interest are paid every series of maturity dates.
a. Compute for the discount or premium
1) Compute for the present value of the total principal plus interest
payments per period (Principal + Interest where the nominal rate is
multiplied with the carrying balance of the face amount each period.
Use PV of 1 for each period)
2) Get the total present value of all the periodic payments
3) Compare the total PV of all of the periodic payments with the face
amount of the bond
4) The resulting figure is the premium or discount.
b. Amortize the premium or discount using the effective interest method
similarly with the term bond (letters b to h of 2 for term bonds) above
ADDING the periodic principal payments in case of premium or deduct in
case of discount.
c. The period-ending balance or carrying amount of the bond will be
reduced by the total of the principal payment + amortization of the
premium or added in case of discount.
d. The balance of the carrying amount on the last year at maturity date
should be 0.00 in case or premium and the full amount of the face
amount in case of discount.

B. SUBSEQUENT YEARS
4) REVERSAL OF ACCRUAL – TOTAL REVERSAL AT THE START OF THE NEXT ACCOUNTING
PERIOD/YEAR
5) INTEREST PAYMENTS – SAME AS NO. 2
6) ACCRUAL OF INTEREST – SAME AS NO. 3
7) AMORTIZATION – SAME AS NO. 4
8) PRE-TERMINATION, RETIREMENT, REDEMPTION, REFUND, EXTINGUISHMENT,
REACQUISITION AS TREASURY BOND – REFER TO THE DISCUSSION ON THE SUCCEEDING
TOPICS

BONDS PAYABLE –DESIGNATED AT FVPL

 A. IRREVOCABLE DESIGNATION AT THE START OF THE YEAR
B. NO AMORTIZATION OF PREMIUM OR DISCOUNT
 There is no amortization of premium or discount because these are not recognized when
bonds are designated at fair value through profit loss.
 There is no recognition of premium and discount because the bonds are valued at fair
value therefore the face amount is compared with the fair value at the end of the
accounting year.
 Any variances between the face amount and fair value shall be recorded as either profit or
loss (under financing cost or other income or loss account) or in the OCI section of the P&L
C. BOND ISSUE OR TRANSACTION COST IS RECOGNIZED IMMEDIATELY AS EXPENSE
 Since there are no discounts or premiums recognized from which the transaction cost or
bond issue cost will be deducted or added, the transaction or bond issue cost will be
recorded outrightly as expense.
D. MEASUREMENT
1. INITIAL - Recognize at face amount
2. SUBSEQUENT – Fair value changes at yearend
a. If due to credit risk, present under OCI
b. If other than credit risk e.g. price, currency, interest risks, etc., present under profit or
loss (using the financing cost or other income or loss account)
E. FAIR VALUE CHANGES – Compare face amount vs. fair value
1. Fair value higher than face amount – loss (because the increase in fair value has an effect
of increasing the amount of liability or the settlement amount is higher than the liability
i.e. additional payment)
2. Fair value is lower than face amount – gain (because the decrease in fair value has an
effect of decreasing the value of the liability to be settled or settlement amount is lower
that the liability i.e. savings)

II. REFUNDING/REFINANCING, REISSUANCE, RETIREMENT OF BONDS, TREASURY BONDS(OR

REACQUISITION), EXTINGUISHMENT
1. DETERMINE THE TOTAL AMORTIZATION OF THE PREMIUM OR DISCOUNT UP TO THE
RETIREMENT, PRE-TERMINATION, REISSUANCE, REFUNDING OR REACQUISITION DATE
 Check the total amortized life from the date of sale up to termination date
 The amortized life over the total life of the bond multiplied by the discount or period is the
total amortization from sale date to termination date
2. DETERMINE THE BALANCE OF THE PREMIUM OR DISCOUNT ON BONDS PAYABLE
 Discount or premium minus total amortization
3. COMPUTE FOR THE ACCRUED INTEREST TO BE PAID ON RETIREMENT
  From last interest payment date up to the retirement date
 This is needed because the interest has to be included in the amount to be paid for the
retirement of the bond.
4. COMPUTE FOR THE CASH PAYMENT
 Retirement price is CASH
 Accrued interest is INTEREST EXPENSE (added to CASH) because this is to be paid
5. COMPUTE FOR THE BALANCE OF THE BONDS PAYABLE INCLUDING THE BALANCE OF THE
DISCOUNT OR PREMIUM
 Face amount of the bonds payable in case of TERM BONDS or
 Face amount of bonds payable minus principal payments made in case of SERIAL BONDS
 Add: Balance of Premium if sold at premium or (computed on No. 2)
 Deduct: Balance of Discount is sold at discount (computed on No. 2)
6. COMPUTE FOR THE GAIN OR LOSS ON RETIRMENT OR EXTINGUISHMENT
 Carrying amount of the bonds payable (computed on no. 5 i.e. face amount add balance
of premium or deduct balance of discount)
 Deduct Retirement Price
 If retirement price is lower, gain (because you will pay less to settle the obligation)
 If retirement price is higher, loss (because you will pay more to settle the obligation
7. THE GAIN OR LOSS IS RECORDED IN THE INCOME STATEMENT AS FINANCE COST OR OTHER
INCOME
8. IF NOT ALL OF THE BONDS ARE EXTINGUISHED
a. INTEREST -
 For the amount to be extinguished, the basis for the interest payment will only be
to the extent of the amount that will extinguished up to the date of
extinguishment.
 For the remaining amount, the basis for the accrual of interest will be the
remaining amount up to the financial reporting date.

b. DISCOUNT OR PREMIUM AMORTIZATION –

 The discount or premium is computed based on the difference between the total face
amount and the total cash selling price or present value whichever is applicable.
 The basis for the amortization of the premium or discount on the other hand is an
allocation of the face amount of the extinguished portion over the total bonds
payable e.g. if 1,000 will be extinguished out of 5,000, the allocation will be 1,000 /
5,000 or 1/5.
 The allocation is done for simplicity and ease in determining the related amounts to
be recorded for the amount that will be extinguished.