Chap 5

• Bond


  A formal unconditional promise, made under seal, to pay a specified sum of money at a determinable future date and to make periodic interest payment at a stated rate
• Bond


  A contract of debt whereby one party called the issuer borrows funds from another party called the investor
• Bond


  Evidenced by a certificate and the contractual agreement between the issuer and investor is contained in a document known as bond indenture
• Types of bonds


  • Term bonds
  • Serial bonds
• Term bonds


  Bonds with a single date of maturity
• Serial bonds


  Bonds with a series of maturity dates instead of a single one
• Types of bonds


  • Mortgage bonds
  • Collateral trust bonds
  • Debenture bonds
• Mortgage bonds


  Bonds secured by a mortgage on real properties
• Collateral trust bonds


  Bonds secured by shares and bonds of other corporation
• Debenture bonds


  Unsecured or bonds without collateral security
• Types of bonds


  • Registered bonds
  • Coupon or bearer bonds
• Registered bonds


  Require the registration of the name of the bondholders on the books of the corporation
• Coupon or bearer bonds


  Unregistered bonds where the name of the bondholder is not recorded on the entity books
• Other types of bonds

  • Convertible bonds
  • Callable bonds
  • Guaranteed bonds
  • Junk bonds
  • Zero-coupon bonds
• Convertible bonds


  Bonds that can be exchanged for shares of the issuing entity
• Callable bonds


  Bonds which may be called in for redemption prior to the maturity date
• Guaranteed bonds


  Bonds issued whereby another party promises to make payment if the borrower fails to do so
• Junk bonds


  High-risk, high-yield bonds issued by entities that are heavily indebted or otherwise in weak financial condition
• Zero-coupon bonds


  Bonds that pay no interest but the bonds offer a return in the form of a "deep discount" or huge discount from the face amount
• Contents of bond indenture


  • Characteristics of the bonds
  • Maturity date and provision for repayment
  • Period of grace allowed to issuing entity
  • Establishment of a sinking fund and the periodic deposit therein
  • Deposit to cover interest payments
  • Provisions affecting mortgaged property, such as taxes, insurance coverage, collection of interest or dividend on collaterals
  • Access to corporate books and records of trustee
  • Certification of bonds by trustee
  • Required debt to equity ratio
  • Minimum working capital to be maintained, if any
• Bond indenture


  The contract between the bondholders and the borrower or issuing entity
• Bond certificates


  Used to represent a portion of the total loan, with a usual minimum denomination of P1,000
• Trustee


  Holds title to the property serving as security for the bond issue, and acts as the representative of the bondholders
• Registrar or disbursing agent


  Bank or trust entity appointed to hold the interest and principal payments and distribute them to the bondholders
• Bonds are usually too large for one buyer to pay, so they are divided into various denominations to enable more than one buyer or investor to purchase them
• The sale of the bonds is usually undertaken by an underwriter or investment bank that assumes responsibility for reselling the bonds to investors
• When an entity sells a bond issue, it undertakes to pay the face amount of the bond issue on maturity date and the periodic interest
• Interest is usually payable semiannually or every six months, although some bonds pay interest annually or at the end of every bond year
• Initial measurement of bonds payable

  Bonds payable designated at fair value through profit or loss are measured initially at fair value minus transaction costs directly attributable to the issue of the bonds payable
• Subsequent measurement of bonds payable

  After initial recognition, bonds payable shall be measured either at amortized cost, using the effective interest method, or at fair value through profit or loss
• Amortized cost of bonds payable


  The amount at which the bond liability is measured initially minus principal repayment, plus or minus the cumulative amortization using the effective interest method of any difference between the face amount and present value of the bonds payable
• The difference between the face amount and present value is either discount or premium on bonds payable
• Approaches in accounting for the authorization and issuance of bonds

  • Memorandum approach
  • Journal entry approach
• Under the memorandum approach, a memorandum entry is made in the general journal to record the authorization and issuance of the bonds at face amount
• Under the journal entry approach, entries are made to record the authorization and issuance of the bonds at face amount
• Issuance of bonds payable at a premium


  When the issue price is more than the face amount of the bonds payable, the bonds are said to be sold at a premium
• The premium on bonds payable is amortized over the life of the bonds payable and credited to interest expense
• Issuance of bonds payable at a discount


  When the issue price of the bonds payable is less than the face amount, the bonds are said to be sold at a discount
• The discount on bonds payable is not treated as an outright loss, but is amortized over the life of the bonds payable and charged to interest expense
• Issuance of bonds payable at a discount


  If the issue price of the bonds payable is less than the face amount, the bonds are said to be sold at a discount