Summary Financial Accounting: Bonds Payable

Bonds Payable (BP)

- A contract of debt whereby one party (issuer) borrows funds from another party
(investor).
- Evidenced by a certificate and the contractual agreement between the issuer and
investor is contained in the bond indenture.
- A financial liability.

Issuance:

1. Discount = Nominal < Effective
= Present Value < Face Value
2. Premium = Nominal > Effective
= Present Value > Face Value

Bond Issue Cost:

1. Discount
Discount on Bonds Payable xx
Cash xx
2. Premium
Premium on Bonds Payable xx
Cash xx

Retirement

- On maturity date = no gain or loss
- Prior to maturity date:
1. Loss on retirement = Retirement Price Bonds Payable > CV of Bonds Payable
(without accrued interest)
2. Gain on retirement = Retirement Price Bonds Payable < CV of Bonds Payable
(without accrued interest)

Compound Financial Instrument (CFI)

- A financial instrument that has the characteristics of both liability and equity.

Issue Price of CFI xx
Issue Price of BP without Equity (xx)
Value Assigned to Equity xx

Bonds with Share Warrants

- Bonds with warrants to acquire a fixed number of the entity’s own equity instrument for
a fixed amount.
- Ordinary Share Warrants Outstanding (Share Premium)