Valuation Bonds Payable Reviewer PDF

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Bonds Payable Definition

Life of Bond has 3 stages

Bon Bonds ds pay payable able - 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.

1. Issuance Stage 2. FS preparation 3. Payment Stage

Bonds vs other long terms Issues or documented by To In exchange of

Notes Payable

Loans payable

Bonds Payable

Promissory note

Promissory Note

Indenture Bond Certificate

Seller of Goods or Services Goods Services PPE

Bank (Financial Institution) Cash

General Investing Public * Cash

*Look for companies with excess funds that’s willing to invest. Such companies don’t see their loan to you as loans or receivable but rather an inve investme stme stment nt nt. Commonly, you transact an unde underwri rwri rwriter, ter, is the agent that serves as your bridge to the general investing public. They’re the ones that looks for companies who wants to invest.

Classification of Bonds As To Principal Payment 1. Ter Term m Bo Bonds nds nds- An issue of bonds that mature at the same time; lump-sump payment 2. Seri Serial al bo bond nd –matures in portions over several different dates; installment

As to security 1. Sec Secured ured Bond Bondss- Bonds payable with collateral; has security in case one can’t or will not pay the payables; usually required for companies with low credit ratings . If sec secured ured by The Then n cla classify ssify as Real Property Mortgage Bond Payable Investment (like shares) Collateral Bonds Payable Personal Property (moveables) Chattel Mortgage Payable 2. Un Unsecure secure secured d Bo Bonds nds (aka Debenture)- Bonds without Collateral

As to holder 1. Regi Registere stere stered d Bo Bonds nds nds- the Bond Holder is registered in the company’s book and known to the company.  Bonds Payable, unlike other liabilities, is seen as an investment in the eyes of the creditor and it is transferrable and can be sold to other investors.  For registered bonds, it is required for the holder to register so that the payee will know who to pay or who’s the current owner. 2. Be Bearer arer B Bond ond ondss  Gives the interest to an underwriter and he/she will give that to the creditor.

Other classification Con Converti verti vertible ble b bonds onds - gives the holder the right to convert their right from receiving the principal and interest into receiving ownership share from the issuing company. Call Callable able bond bondss - gives the holder the right to pay the principal in advance (ahead of maturity date.) Gua Guarante rante ranteed ed bo bonds nds - gives the holder the right to collect from a guarantor if the issuing company failed to pay. Junk bond bondss - bonds issued by a company with low credit standing but issued at a high interest rate.

Exercises Anything violet means solution or explanation Bon Bonds ds P Payable ayable Cla Classifica ssifica ssification tion - 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 925% collateral trust bonds, convertible into common stock beginning in 2028. due in 19 years 10% subordinated debentures (P30.000 maturing annually beginning in 2020) What is the total amount of ITS term bonds?

700 000 600 000 800 000

Classification Ter Term m (if silent term bonds) also registered, debenture and callable Ter Term, m, secured bond, convertible bond Seri Serial al bo bonds nds nds, debenture

A. 600 000 B. 700 000 C. 1000000 D. 1 300 000 Answer: D Bon Bonds ds P Payable ayable Cla Classifica ssifica ssification tion - Sec Secured ured vvs. s. Un Unsecure secure secured d 2) IT Corporation December 31. 2018 balance sheet contained the following items in the lon g-lerm liabilities section: Classification Secured ured , chattel mortgage 10% registered bonds, callable in 2019. due in 2028, 3000000 Sec bond secured by machinery Secured ured , mortgage bond 11% bonds. convertible into common stock 5000000 Sec beginning in 2018, due in 2025, secured by realty Secured ured , investment 12% collateral trust bonds P50.000 maturing 7000000 Sec annually What are the total amounts of IT’s secured bonds? A. 15 000 000 B. 12 000 000 C.10 000 000 D. 8 000 000 Answer: A

Initial Measurement of Bonds Payable Method 1 FOR FORMU MU MULA LA Fair Value of Bonds Less: Transaction Cost

Init Initial ial M Measu easu easurem rem rement ent If CASH

Pxx (xx)

Fair Value=Issue Price=Market Price=Cash Receipt Payment for services related to issuance of bonds such as Commission fee, Underwriter’s fee, Agent fee, Legal fee, Accounting fee, Documentary Stamp Tax (DST)

Pxx

 Exactly on interest date: Issue Price=FV of Bonds  If issued between interest dates: Issue Price = FV of Bonds Interest receivable sold

ACCRUED INTEREST

Init Initial ial M Measu easu easurem rem rementent- Bond Bondss Sol Sold d wi with th A Accrue ccrue ccrued d In Intere tere terest st 6) May 1, 2019, Raiders Company issued P2.000.0DO. 10 years, 9% bonds at 105 including accrued interest. These bonds are dated January 1, 2019. Interest is payable semi-annually on January 1 and July 1. Transaction costs of P10,000 warn paid by Raiders. What is the carrying amount of bonds payable on May 1. 2019? A. 2.090.000 B. 2.030.000 C. 2.150.000 D. 2.160.000

Answer: B Solution:

Issue Price(Including Interest) Interest receivable sold Fair Value of Bonds Less: Transaction Cost Init Initial ial M Measu easu easurem rem rement ent

Xx (xx) Pxx (xx) Pxx

2100000 (60000) (2040000) (10000) 2030000

2 000 000 x 1.05

Method 2 -Do this if Fair Value is not given Principal Nominal Interest PV of Ca Cashflo shflo shflow w (IM (IM))

Amount xx xx

x x x

PV Factor (Orig ER) xx xx

= = =

PV Amount xx xx xx

To compute the Present Value of the Principal and Interest, get first the PV Factor using the EFFECTIVE INTEREST RATE PV of 1

PV of Ordinary Annuity PV of Annuity Due

PRI PRINCIP NCIP NCIPAL AL If Term Bond If Serial bond

One-time payment Also used if series of payment but unequal Use PV of 1 on each year Series of payment (equal payments) First Payment after one period Series of payment (equal payment) First payment made immediately

Whole principal Principal PER installment

Nom Nominal inal Intere Interest st pe perr pe period riod Term Bond Face amount x Serial bond Nominal interest rate

IF INTEREST IS PAYABLE SEMI ANNUALLY, 

EFFECTIVE RATE IS DIVDED BY 2

 NUMBER OF PERIODS IS TIMES 2

x

PV of 1

=

xx

x

PV of annuity

=

xx

x x

PV of annuity PV of 1 (each interest)

= =

xx xx

Initi Initial al M Measure easure easuremen men mentt - F FV V of Term Bon Bonds, ds, An Annu nu nual al Inte Interest rest 3) Ava Company issued 10-year bonds payable with face amount of P4 000 000 on January 1. 2023. The interest is payable annually on December 31 at the 6% stated interest rate. The bonds were issued to yield 9%.

present value of 1 at 6% for 10 periods is 0.56 present value of an ordinary annuity of 1 at 6% for to periods is 7.36. present value of 1 at 9% for 10 periods is 0.42 present value of an ordinary annuity of 1 at 9% for 10 periods is 6.4 6.42. 2. What is the market price of the bonds on January 1, 2023? A. 1.680.000 B. 3,991,200 0. 3,220,800 D. 4.000.000

ANSWER: D

SOLUTION: Since it’s silent, it’s term bonds Amount Principal 4000000 Nominal Interest 2400000* PV of Ca Cashflo shflo shflow w (IM (IM)) Face Amount X Nominal Int. rate Nom Nominal inal Intere Interest st

40000000 6% 240000

x x x

PV Factor (Annuity) 0.42 6.42

= = =

PV Amount 1680000 1540000 322 3220800 0800

Initi Initial al M Measure easure easuremen men mentt - F FV V of Term Bond Bonds, s, Se Semi mi A Annua nnua nnuall Inte Interest rest 4) Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1. 2022. The bonds pay Interest semiamually on June 30 and December 31. The bonds are issued to yield 5%. Periods PV of 1 at 2.5% PV of Annuity of 1 at 2.5% PV of 1 at 5% PV of 1 at 5% 5 0.884 4.646 0.784 4.330 10 0.781 8.752 0.614 7.722 What are the proceeds form the bond issue? A. 6,531,618 8. 5,216,494 C. 5,217,800 D. 5,215,050 ANSWER: C SOLUTION: Use 2.5% because semi-annual Principal Nominal Interest PV of Ca Cashflo shflo shflow w (IM (IM)) Face Amount x Nominal Int. rate x Semi annual Nom Nominal inal Intere Interest st

Amount 5000000 150000*

5000000 6% 6/12 150000

x x x

PV Factor (Orig ER) 0.781 8.752

= = =

PV Amount 3905000 1312800 521 5217800 7800

IF INTEREST IS PAYABLE SEMI ANNUALLY, EFFECTIVE RATE IS DIVIDED BY 2 NUMBER OF PERIODS IS TIMES 2

Initi Initial al M Measure easure easuremen men mentt - F FV V of Serial Bon Bonds, ds, An Annual nual Inte Interest rest 5) 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. Present value of 1 at 8%: One period 0.9259 Two periods 0.8573 Three periods 0.7938 Determine the market price or issue price of the bonds: A. 5,788,532 8. 5,690,555 0. 4.762.800 D. 5.960.555

ANSWER: A SOLUTION: Principal Nominal Interest Nominal Interest Nominal Interest PV of Ca Cashflo shflo shflow w (IM (IM))

Interest 2021 Interest 2021 Interest 2021

Amount 2000000 360000 240000 120000

x x x

Face Amount x Nominal Rate 6 000 000 x 6% 4 000 000 x 6% 2 000 000 x 6%

PV Factor (Orig ER) 2.5771 0.9259 0.8573 0.7938

360000 240000 120000

= = = = =

PV Amount 5154200 333324 205752 95256 578 5788532 8532...