BOND Payable Problems PDF

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PROBLEM 1: Issuance of bond on interest dates On January 1, 2020, ABC Co, issued 10%, three-year, P1,000,000. Interest on these bonds are due annually every year-end. Required: Provide the necessary journal entry/ies on the date of issuance under the following independent cases: Bonds were issued at...

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PROBLEM 1: Issuance of bond on interest dates On January 1, 2020, ABC Co, issued 10%, three-year, P1,000,000. Interest on these bonds are due annually every year-end. Required: Provide the necessary journal entry/ies on the date of issuance under the following independent cases: 1. Bonds were issued at face amount. 2. Bonds were issued to yield 8% 3. Bonds were issued to yield 12% 4. Bonds were issued to yield 12 but were quoted at 98. 1. Cash

1,000,000 Bonds Payable

1,000,000

2. Present value of principal (1,000,000 x 0.7938)

793,800

Add: Present value of interest (1,000,000 x 10% x 2.5771)

257,710

Total present value

1,051,510

The transaction is then recorded as follows: Cash

1,051,510 Bonds payable (at face value amount)

1,000,000

Premium on bonds payable

51,510

3. Present value of principal (1,000,000 x 0.7118)

711,800

Add: Present value of Interest (1,000,000 x 10% x 2.4018)

240,180

Total

951,980

The transaction is then recorded as follows: Cash

951,980

Discount on bonds payable (1,000,000 - 951,980)

48,020

Bonds payable (at face amount)

1,000,000

4. Cash

980,000

Discount on bonds payable

20,000

Bonds payable (at face amount)

1,000,000

PROBLEM 2: Issuance of bonds at premium on interest date ABC Corp. is authorized to issue P1,000,000 of five-year bonds dated June 30, 2020 with a stated interest rate of 10%. Interest on the bonds is payable semi-annually on June 30 and December 31. The company uses the effective interest method. The bonds were sold to yield 8%. Required: Determine the following: (round off present value factors to four decimal places) 1. Bond Issue price 2. Interest expense for 2020 and 2021 3. Carrying value of the bonds on December 31, 2020 and 2021. 4. Entries to record transaction on 2020. SOLUTION: 1. Issue Price, 06/30/2020 Present value of principal (1,000,000 x 0.6756) 675,600 Present value of interest (1,000,000 x 5% x 8.1109) 405,545 Total Issue price - June 30, 2020 1,081,145 Date Interest Value

Interest Premium

Present Payment

Payment Expense

06/30/2020

Amortization 1,081,145

12/31/2020

50,000

43,246

6,754

1,074,391

06/30/2021

50,000

42,976

7,024

1,067,366

12/31/2021

50,000

42,695

7,305

1,060,061

06/30/2022

50,000

42,402

7,598

1,052,464

12/31/2022

50,000

42,099

7,901

1,044,562

06/30/2023

50,000

41,782

8,218

1,036,345

12/31/2023

50,000

41,454

8,546

1,027,798

06/30/2024

50,000

41,122

8,888

1,018,910

12/31/2024

50,000

40,756

9,244

1,009,667

06/30/2025

50,000

40,387

9,666

1,000,000

* * Prior to principal payment 2. Interest expense for 2020 and 2021 Interest expense, 12,31,2020 43,246 Interest expense from 01/01/2021 to 06/30/2021

45,976

Interest expense from 07/01/2021 - 12/31/2021

42,695

Total Interest expense, 12/31/2021

85,671

3.Carrying amount for 2020 and 2021 Carrying amount, 12/31/2020

1,074,391

Carrying amount, 12/31/2021

1,060,061

4.Entries to record transaction in 2020 To record issuance of the bonds on June 30, 2020 Cash

1,081,145 Bonds payable (@ face amount)

1,000,000

Premium on bonds payable

81,145

To record interest payment on December 31, 2020 Interest expense

50,000

Cash (1,000,000 x 12% x 6/12)

50,000

To record premium amortization on December 31,2020 Interest expense Cash (1,000,000 x 12% x 6/12)

50,000 50,000

Financial Statement Presentation (2020) Statement of Financial Position (Non- currently liability section) Bonds payable 1,074,391 BOND PAYABLE PROBLEMS Statement of Comprehensive Income Interest Expense 43,246

Notes to Financial Statements Bonds payable 1,000,000 Add: premium on Bonds payable 74,391 Net Carrying amount 1,074,391

PROBLEM 3: Issuance of bonds at a discount on interest date ABC Corp. is authorized to issue P1,000,000 of five-year bonds dated June 30, 2020 with a stated interest rate of 10%. Interest on the bonds is payable semi-annually on June 30 and December 31. The company uses the effective interest method. The bonds were sold to yield 12%. Required: Determine the following: (round off present value factors to four decimal places) 1. Bond Issue price 2. Interest expense for 2020 and 2021 3. Carrying value of the bonds on December 31, 2020 and 2021. 4. Entries to record transaction on 2020. SOLUTION Present value of 1 using 6% for 10 periods is .5584 while the present value of ordinary annuity using 6% for 10 periods is 7.3601. 1. Issue Price, 06/30/2020 Present value of principal (1,000,000 x 0.5584) 558,400 Present value of interest (1,000,000 x 5% x 7.3601) 368,005 Total Issue price - June 30, 2020 926,405 Date Interest 06/30/2020

Interest Discount

Present Payment

Expense

Amortization Value 926,405

12/31/2020

50,000

55,584

5,584

931,989

06/30/2021

50,000

55,919

5,919

937,909

12/31/2021

50,000

56,275

6,275

944,183

06/30/2022

50,000

56,651

6,651

950,834

12/31/2022

50,000

57,050

7,050

957,884

06/30/2023

50,000

57,473

7,473

965,357

12/31/2023

50,000

57,921

7,921

973,279

06/30/2024

50,000

58,397

8,397

981,675

12/31/2024

50,000

58,901

8,901

990,576

06/30/2025

50,000

59,424

9,424

1,000,000

* * Prior to principal payment For requirements (2) and (3), refer to amortization table: 2. Interest expense for 2020 and 2021 Interest expense, 12/31/2020

55,584

Interest from 01/01/2021 to 06/30/2021

55,919

Interest from 07/01/2021 - 12/31/2021

56,275

Total Interest expense, 12/31/2021

112,194

3. Carrying amount for 2020 and 2021 Carrying amount, 12/31/2020 931,989 Carrying amount, 12/31/2021 944,183 4. to record transactions in 2020 1. To record the issuance of the bonds on June 30, 2020 Cash

926,405

Discount on bonds payable

73,595

Bonds payable (at face amount)

1,000,000

2. To record interest payment on December 31, 2020 Interest expense

50,000

Cash (1,000,000 x 12% x 6/12)

50,000

2. To record premium amortization on December 31, 2020 Interest expense Discount on bonds payable

5,584 5,584

Financial Statement Presentation (2020) Statement of Financial Position (Non- currently liability section) Bonds payable 1,074,391 Statement of Comprehensive Income Interest Expense 43,246 Notes to Financial Statements Bonds payable 1,000,000 Add: premium on Bonds payable 74,391

Net Carrying amount 1,074,391 Important notes to Effective Interest Method When using the effective interest method, the behavior of the following items should be noted: Issuance Carrying Value Interest Expense Amortization at a premium At a discount Declining Increasing Declining Increasing Increasing Increasing 6 BOND PAYABLE PROBLEMS PROBLEM 4: Issuance on interest date of serial bonds ABC Corp. issued bonds with face value of P6,000,000 on January 1, 2020. The nominal rate of 6% is payable annually on December 31. The bonds are issued with 8% effective yield. The bonds mature on every December 31 each year at the rate of P2,000,000 for three years. Required: Determine the following: (round off present value factors to four decimal places) 1. Bond Issue price 2. Interest expense for 2020 and 2021 3. Carrying value of the bonds on December 31, 2020 and 2021. 4. Entries to record transaction on 2020 SOLUTION: 1. Issue Price Present value of Principal Payments (2,000,000 x 2.5771) 5,154,200 Present Value of Interest Payments 2020 (6,000,000 x 6% x 0.9259) 333,324 2021 (4,000,000 x 6% x 0.8573) 205,752 2022 (2,000,000 x 6% x 0.7938) 95,256 634,332 5,788,532 Amortization Table Date

Total Interest

Reduction to Present

Payment Expense

01/01/2020

principal Value 5,788,532

12/31/2020

2,360,000

463,083

1,896,917

3,891,615

12/31/2021

2,240,000

311,329

1,928,671

1,962,944

12/31/2022

2,120,000

157,035

1,962,944

Note: Total payment consist of principal and interest payment. 2. Interest expense Interest expense, 2020 463,083

3. Carrying amount Carrying amount,12/31/2020 3,891,615 Note: Alternatively, the present value of serial bonds may be computed as follows (any difference is due to rounding off): Date Total PV of 1 Present Payment Value 12/31/2020 2,000,000 + 360,000 0.9259 2,185,124 12/31/2021 2,000,000 + 240,000 0.8573 1,920,352 12/31/2022 2,000,000 + 240,000 0.7938 1,682,856 2,000,000 + 120,000 5,788,332

4.Entries to record transaction in 2020 1. To record the issuance of bonds on January 1, 2020 Cash

5,788,532

Discount

211,468

Bonds payable

6,000,000

2. To record interest payment on December 31, 2020 Bonds payable

360,000

Cash

360,000

3. To record principal payment on December 31, 2020 Bonds payable

2,000,000

Cash

2,000,000

4. To record discount amortization on December 31, 2020 Interest Expense Discount on bonds payable

103,083 103,083

Financial Statement Presentation (2020) Statement of Financial Position Current liability section Bonds payable - Current Portion 1,928,671 Non- current liability section Bonds payable - non-current 1,962,944 Statement of Comprehensive Income Interest Expense 463,083 Notes to Financial Statements

Bonds payable 4,000,000 Less: Discount on Bonds Payable -108,385 Net Carrying amount 3,891,615 * Reduction of principal in 2021. See amortization table above.

PROBLEM 5: Issuance of Bonds between interest dates On March 1, 2020, ABC Co. issued 12%, five-year P1,000,000 at 98 including interest. These bonds were dated January 1, 2020. In addition, interest on these bonds are due annually every December 31. Required: Entries for 2020 (round 0off present value factors to four decimal places):

8 BOND PAYABLE PROBLEMS SOLUTION: When bonds are issued between interest dates, the total proceeds from the issuance is composed of two; (1) amount received from issuance of bonds and (2) amount received for interest which had accrued from interest date to issuance date. The initial measurement of the bonds shall be equal to the portion of the total proceeds applicable to the bonds or total proceeds, net of accrued interest. In the given data, the bonds were issued at 98% of the face amount or P980,000 (P1,000,000 x 98%). This allocated as follows: Total proceeds 980,000 Less: Accrued interest (1,000,000 x 12% x 2/12) 20,000 Proceeds applicable to the bonds 960,000 The transaction is then recorded as follows: Cash 980,000 Discount on bonds payable 40,000 Bonds payable (at face amount) 1,000,000 Interest expense * 20,000 * The accrued interest may also be credited to interest payable account. Pro-forma entries for transaction related to the issuance in 2020 include: 1. To record interest payment on December 31, 2020 If accrued interest is credited to interest expense interest expense 120,000 Cash (1,000,000 x12%) 120,000

If accrued interest is credited to interest payable Interest expense 100,000 Interest payable 20,000 Cash (1,000,000 x 12%) 120,000 2. To record discount amortization on December 31, 2020 Interest expense 120,000 Discount on bonds payable (40,000/5 x 10/12) 120,000 Note: To amortize these bonds, an effective interest rate shall be computed through interpolation. PROBLEM 6: Issuance of Term bonds between interest dated On January 1, 2020, ABC Co. is planning to issue a 12%, five-year P1,000,000 bonds. Interest on these bonds are due annually every year-end. ABC determines that the current market rate on January 1 is 15%. Required: Compute for the amount of proceeds received from issuance assuming bonds were issued on (round off present value factors to four decimal places): 9 BOND PAYABLE PROBLEMS 1. January 1, 2020 2. March 1, 2020 Solution: Bonds were issued on January 1, 2020 Present value of Principal Payments (P1,000,000 x 0.4972) P 497, 200 Present value of the Interest Payments (P1,000,000 x 12% x 3.3522) 402,264 Total P 899,464 Bonds were issued on March 1, 2020 In computing for proceeds from issuance between interest dates, we can simply compute for the carrying amount on issue date assuming the bonds were issued at interest date. In this example, let us compute for the carrying amount on March 1, 2020 assuming that the bonds were issued on January 1, 2018. Since we have already computed for the issuance price on January 1, 2020, all we have to do is to amortize it as follows: Date Interest Payment Interest Expense Discount Amortization Carrying Value 01/01/2020 01/31/2020 120,000 134,920 14,920 P 899,464 914,384 12/31/2021 12/31/2022 12/31/2023 12/31/2024 120,000 120,000 120,000 120,000 137,158 139,731 142,691 146,094 17,158 19,731 22,691 23,036 931,541 951,272 973,963 P1,000,000 Based on the above amortization table, we can say that the issue price on March 1, 2020 is between the carrying value as of January 1, 2020 and December 31, 2020 amounting to P899,464 and P914,384, respectively. Also, let us note that the difference between these two amounts represent the discount amortization for one year or twelve (12) months. With these, the issue price would be:

Carrying amount, January 1, 2020 P 899,464 Add: Discount amortization from January 1 to March 1 (P14,920 x 2/12) 2,487 Proceeds applicable to the bonds P901,951 Add: Accrued interest (P1,000,000 x 12% x 2/12) 20,000 Total proceeds from issuance P921,951 Alternatively, the proceeds applicable to the bonds may be computed as if the bond issued on interest date (January 1, 2020) was amortized for two months or up to March 1, 2020. 10 BOND PAYABLE PROBLEMS Date Interest Payment Interest Expense Discount Amortization Carrying Value 01/01/2020 03/01/2020 20,000 22,487 2,487 P 899,464 901,951 Derecognition - Bonds Payable A financial liability should be removed from the statement of financial position when, and only when, it is extinguished, that is, when the obligation specified in contract is either discharged, cancelled or expired. Retirement of Non-convertible Bonds Payable (note: If the problem is silent, assume that the bonds are non-convertible) Summary of accounting treatments Retirement price Retirement of applicable to principal bonds prior to date of maturity Carrying amount of bonds on the date of maturity Procedural approach in retiring regular bonds Step 1 Update the amortization of the bonds payable as of the date of retirement. Step 2 Compute for the gain or loss on retirement using this formula: Retirement price applicable to principal xxx Less: Carrying amount of bonds payable xxx Loss/(gain) on retirement of bonds xxx Note: No gain or loss on retirement of bonds maturity Step 3 Record the transactions as follows: Bonds payable (@face amount) xxx Premium on bonds payable (if applicable) xxx Loss on retirement of bonds (if applicable) xxx Cash (retirement price) xxx

Discount on bonds payable (if applicable) xxx Gain on retirement of bonds (if applicable) xxx Difference is recognized as gain or loss on extinguishment of bonds (part of profit or loss for the period) Retirement of Settlement price and bonds on maturity carrying amount will date be equal to Face amount No gain or loss is recognized 11 BOND PAYABLE PROBLEMS PROBLEM 7: Retirement of Bonds ABC Corp. is authorized to issue P1,000,000 of five-year bonds dated on June 30, 2019 with a stated interest rate of 10%. Interest on the bonds is payable semi-annually on June 30 and December 31. The company uses the effective interest method. The bonds were sold to yield 8%. Required: Determine the amount of gain or loss assuming the bonds were retired under the following independent situations. (round off present value factors to four decimal places): 1. On January 1, 2020 at face amount 2. On April 1, 2022 at 105 3. On June 30, 2022 SOLUTION: The data in this illustration are similar with that of illustration 2 Issuance of bonds at a premium on interest date. With this, we can simply copy the amortization table to be able to address the requirements of this problem. Date Interest Interest Premium Payment Expense Amortization Carrying Value 06/30/2019 1,081,145 12/31/2019 50,000 134,920 6,754 1,074,391 06/30/2020 50,000 137,158 7,024 1,067,366 12/31/2020 50,000 139,731 7,305 1,060,061 06/30/2021 50,000 142,691 7,598 1,052,464 12/31/2021 50,000 146,094 7,901 1,044,562 06/30/2022 50,000 134,920 8,218 1,036,345 12/31/2022 50,000 137,158 8,546 1,027,798 06/30/2023 50,000 139,731 8,888 1,018,910 12/31/2023 50,000 142,691 9,244 1,009,667 06/30/2024 50,000 146,094 9,666 1,000,000 * * Prior to principal payment 1. January 1, 2020 at face amount Retirement price 1,000,000 Less: Carrying amount (see amortization table) -1,074,391 Gain on retirement of bonds 74,391 2. April 1, 2020 at 105 Retirement price (1,000,000 x 105%) 1,050,000 Less: Carrying amount (see amortization table) Carrying amount, 12/31/2021 1,044,562 Less: Amortization up to 04/01 (8,218 x 3/6) -4,109 - 1,040,453

Loss on retirement of bonds 9,547 3.June 30, 2022 Zero. On June 30, 2022 maturity date, the retirement price and the carrying amount is equal to the face amount of the bonds. Thus, no gain or loss shall be recognized. 12 BOND PAYABLE PROBLEMS Compound Financial statements Compound financial statements are financial instruments that have both a liability and an equity component from the issuer’s perspective. Examples include the following: a. Convertible bonds b. Debt instruments issued with detachable share purchase warrants Accounting Treatment Split accounting According to PAS 32, the component parts of the compound financial instruments must be accounted for and presented separately according to their substance based on the definitions of liability and equity. Approach on how to split According to par.31 of PAS 32, "when the initial carrying amount of a compound financial instruments is required to be allocated to its liability and equity components, the equity components is assigned the residual amount after deducting from the fair value of the instrument as a whole, the amount separate...