This document summarizes long-term liabilities such as bonds payable and notes payable. It discusses the different types of bonds including term bonds, serial bonds, and convertible bonds. It provides examples of journal entries for issuing bonds at par value, a premium, and a discount. It also discusses accounting for bond interest expense, premium or discount amortization, and bond retirement or refinancing. Notes payable are also discussed including accounting for non-interest bearing and interest bearing notes for both cash and property transactions.

1. 1
LONG TERM LIABILITIES
BONDSPAYABLE – unconditional promise,made underseal,topaya specifiedsumof moneyata
determinable futuredate,andtomake periodicineterestpaymentata statedrate until the principal
sumis paid;contract of debt
- Evidencedby:
 BondIndenture – legal contractbetweenthe issuerandinvestor thatspecifiesthe
scope and responsibilitiesof the brrowerandotherdetails.
 Bondcertificate – legal documentdescribingthe indebtednessof aborrowerand
the termsof payment.
TYPES OF BONDS
- TERM BONDS
o Bondswitha single date of maturity
- SERIAL BONDS
o Bondswitha seriesof maturitydates;installments
- MORTGAGE BONDS
o Securedbya mortgage on real properties
- COLLATERAL TRUST BONDS
o Securedbystocksand bondsof othercorporation
- DEBENTURE BONDS
o Bondswithoutcollateral security
- REGISTERED BONDS
o Require the registrationof the name of the bondholderonthe booksof the corporation
- BEARER BONDS
o Bondholdersare notrecordedonthe books
- CONVERTIBLEBONDS
o Bondsthat can be exchangedforsharesof the issuingentity
- CALLABLE BONDS
o Bondswhichmay be calledinforredemptionpriortothe maturitydate
- GUARANTEED BONDS
o Anotherpartypromisestomake paymentif the borrowerfailstodoso
- JUNK BONDS
o High-risk,high-yieldbondsissued byentitiesthatare heavilyindebtedorotherwise in
weakfinancial condition
Initial measurement:FAIRVALUE
Subsequentmeasurement:
- AMORTIZED COST (effectiveinterestmethod)
- FAIRVALUE THROUGH PRFOFITOR LOSS
ISSUANCEOF BONDS
JOURNAL ENTRYMEMORANDUM
UnissuedBondsPayableNo entry/memouponissuance
AuthorizedBondsPayable
CashCashsubsequentsale
UnissuedBondsPayableBondsPayable

2. 2
below par/discountabove par/premiumat PAR
ER>NRER<NRER=NR
ISSUANCEOF BONDSAT A PREMIUM
- Salesprice ismore than the face value of the bonds
- Effective rate <Nominal Rate
Illustration:
A entityissuedbondswithaface amountof 2M at a quotedprice of 103.
Cash (2M x 1.03) 2,060,000
BondsPayable 2,000,000
PremiumonBondsPayable 60,000
ISSUANCEOF BONDSAT A DISCOUNT
- Salesprice islessthanthe face value of bonds
- Effective rate >Nominal Rate
Illustration:
An entityissuedbondswithaface amountof 2M at a quotedprice of 98.
Cash (2M x 0.95) 1,900,000
DiscountonBonds Payable 100,000
BondsPayable 2,000,000
INTEREST ON BONDS
On May 31, 2018, an entityissiuedbondswithaface amountof 1M and10% ineterestpayable
semiannuallyonMay 1 and October1.
- Paymentof interestduringthe year
10/31/18 InterestExpense (1Mx 0.10 x ½) 50,000
Cash 50,000
- Accrual of interest
12/31/18 InterestExpense (1Mx 0.10 x 3/12) 25,000
AccruedInterestPayable 25,000
BOND ISSUE COST
- Tansactioncosts thatae directlyattributableto the issue of bondspayable
o Printingandengraving
o Legal and accountingfee
o Registrationfee withregulatoryauhtorities
o Commissionspaidtoagentsandunderwriters
- Shall be deductedfromthe fairvalue orissue price
- Expensedif bondsare measuredatfair value throughprofitorloss
ISSUANCEOF BONDSON INTEREST DATES
On August1, 2018, the entityissued 1M4-yr bondswitha face amountof 1M at 102 that pays
10% semiannuallyon August1and November1.

3. 3
8/1/18 Cash (1Mx 1.02) 1,020,000
PremiumonBondsPayable 20,000
BondsPayable 1,000,000
11/01/18 InterestExpense (1Mx 0.10 x ½) 50,000
Cash 50,000
12/31/18 InterestExpense (1Mx 0.10 x 2/12) 16,667
AccruedInterestPayable 16,667
PremiumonBondsPayable 2,083
InterestExpense 2,083
[(20,000/4) x 5/12]
ISSUANCEOF BONDSBETWEEN INTEREST DATES
On September1,2018, the entityissued1M4-yr bondswitha face amountof 1M at 102 that
pays10% semiannuallyonAugust1and November1.
Issue Price 1,020,000
AccruedInterest(1Mx 0.10 x 1/12) 8,333
Total cash received 1,028,333
9/1/18 Cash 1,028,333
PremiumonBondsPayable 20,000
BondsPayable 1,000,000
InterestExpense 8,333
11/01/18 InterestExpense (1Mx 0.10 x ½) 50,000
Cash 50,000
12/31/18 InterestExpense (1Mx 0.10 x 2/12) 16,667
AccruedInterestPayable 16,667
PremiumonBondsPayable 1,702
InterestExpense 1,702
(20,000/47months x 4)
Original life of bonds (4yrs x 12) 48months
Less:Expiredlife 1month
Remaininglife 47months
BOND RETIREMENT
On August1, 2018, the entityissued1M4-yr bondswitha face amountof 1M at 98 that pays
10% semiannuallyonAugust1and November1.

4. 4
Retirementon Maturity Date
8/1/22 BondsPayable 1,000,000
InterestExpense 50,000
DiscountonBonds Payable 70,000
Cash 980,000
Retirementon February1, 2020 at 92
Amortizationof bonddiscount:
70,000/4 = 17, 500 annual amortization
InterestExpense (17,500/2) 8,750
DiscountonBonds Payable 8,750
8/1/18 70,000
8/1/18 – 2/1/20 [(18months/48) * 70,000] (26,250 )
Balance, 2/1/20 43,750
Cash payment:
RetirementPrice 920,000
Accruedinterest
(1M x 10% x 3/12 = 25,000) 25,000
Total Cashpayment 945,000
CarryingAmount:
BondsPayable 1,000,000
DiscountonBonds Payable ( 43,750)
CarryingAmount,2/1/20 956,250
2/1/20 BondsPayable 1,000,000
InterestExpense 25,000
Loss onEarly retirementof bonds
Cash 945,000
DiscountonBonds Payable 43,750
Gain onearlyretirementof bonds 36,250
TREASURY BONDS
- Entity’sownbondsoriginallyissuedandreacquiredbutnotcancelled
Illustration:
A 1M bondwas originallyissuedat105, subsequently,the entityreacquired500,000 face
amountat 102. Atreacquisition,unamortizedpremiumbalance is45,000 and accrued interestis4,000.

5. 5
Acquisition:
Face amount 500,000
Premium(500,000/1M * 45,000) 22,500
CarryingAmount 522,500
Reacquisitionprice (500,000 * 102) (510,000)
Gain onreacquisition 12,500
Reacquisitionprice 510,000
AccruedInterest 45,000
Cash Payment 555,000
Entry:
TreasuryBonds 500,000
PremiumonBondsPayable 22,500
InterestExpense 45,000
Cash 555,000
Gain onacquisitionof TB 12,500
Subsequentsale at 102:
Cash 510,000
TreasuryBonds 500,000
PremiumonBondsPayable 10,000
Subsequentsale at 98:
Cash 490,000
DiscountonBonds Payable 10,000
TreasuryBonds 500,000
BOND REFUNDING/REFINANCING
1. Issuance of new4-yr 10% with1M face amountat 1,100,000
2. Refundingof old10% bondswithremaininglife of 2yearsat 104
BondsPayable-old 1,000,000
DiscountonBonds Payable 10, 000
Retirementprice (1M* 1.04) 1,040,000
Entry:
1. Cash 1,100,000
BondsPayable 1,000,000
PremiumonBondsPayable 100,000

6. 6
2. BondsPayable 1,000,000
Loss onExtinguishmentof bonds 50,000
Cash 1,040,000
DiscountonBonds Payable 10,000
FAIRVALUE OPTION
- No amortization
- Anytransaction/bondissue costare expensedoutright
- InterestExpense isrecognizedusingthe stated/nominal rate
Illustration:
On January1, 2018, an entityissueda12% bondamountingto 1M at 103 to yield10%.Interest
ispayable annuallyonDecember31.The entitypaidbondissue costof 50,000. OnDecember31, 2018,
the fair value of the bondsisdecreasedby80,000.
ENTRY:
1/1/18 Cash 1,030,000
BondsPayable 1,030,000
TransactionCost 50,000
Cash 50,000
12/31/18 InterestExpense 120,000
Cash 120,000
BondsPayable 80,000
Gain fromchange in FV 80,000
Suppose thaton December31,2018, the fair value of the bondsis increasedby100,000; 80,000 is
attributable toincrease inthe marketinterestrate,the remainingisattributable tocreditrisk.
12/31/18 Loss oncreditrisk-OCI 20,000
Loss fromchange in FV 80,000
BondsPayable 100,000
Note:Creditriskdoesnotinclude marketrisks:interest,currencyandprice risk.

7. 7
AMORTIZATION OFBOND DISCOUNTOR PREMIUM
1. StraightLine
Amortization=BondDiscountor Premium/Life of the bonds
2. BondOutstandingMethod(serial bonds)
Illustration 1:
On January1, 2018, an entityissuesa10% bondwitha face amountof 1M at 102 that
pays200,000 yearlyforfive years.
Table of amortization
PremiumAmortizationFractionBond OutstandingYear
6,666.001000/30001,000,000.002018
5,333.00800/3000800,000.002019
4,000.00600/3000600,000.002020
2,666.00400/3000400,000.002021
1,333.00200/3000200,000.002022
20,000.003,000,000.00

8. 8
NOTES PAYABLE – a liabilityinwritingmade byone persontoanother,signedbythe maker,
promisingtopaya specificamountof moneyata future date or on demand
Initial Measurement:FAIRVALUE/PRESENT VALUE
Subsequentmeasurement:
- AMORTIZED COST (effectiveinterestmethod)
- FAIRVALUE THROUGH PRFOFITOR LOSS
INTEREST BEARING- CASH
 PresentValue =CashProceeds
Illustration:
A 1M note is discountedat10% for one yearon October1, 2018.
Note Payable 1,000,000
Less:Discount(10% x 1M) 100,000
NetProceeds 900,000
Entry: October1, 2018
Cash 900,000
DiscountonNote Payable 100,000
Note Payable 1,000,000
Amortization:December31,2018 (straightline method)
InterestExpense (100,000 * 3/12) 25,000
DiscountonNote Payable 25,000
INTEREST BEARING– PROPERTY
 PresentValue =Purchase Price
Illustration:
An entityacquiredamachineryfor1M payable in4 annual equal installmentsonDecember31.
Interestis10% on the unpaid.
Entry: Jan 1, 2018
Machinery 1,000,000
Note Payable 1,000,000
FirstPayment:December31,2018
InterestExpense (1M* 10%) 100,000
Note Payable (1M/4) 250,000
Cash 350,000
SecondPayment:December31, 2019
InterestExpense (10%*750, 000) 75,000
Note Payable 250,000
Cash 325,000

9. 9
...
NONINTERESTBEARING– PROPERTY
 PresentValue =Cashprice
 ImputedInterest=CashPrice – Face Value
Illustration:
An entityacquiredamachinerywithacash price of 1M for1.2M; 200,000 downand the balance
in5 equal annual installments.
ENTRY: Jan 1, 2018
Machinery 1,000,000
DiscountonNote Payable (1.2M-1M) 200,000
Cash 200,000
Note Payable 1,000,000
FIRST PAYMENT:December31, 2018
Note Payable (1.2M – 200,000)/5 200,000
Cash 200,000
InterestExpense 50,000
DiscountonNote Payable 50,000
YEAR NOTE PAYABLE FRACTION DISCOUNT AMORTIZATION
2018 1,000,000.00 0.33 150,000.00 50,000.00
2019 800,000.00 0.27 150,000.00 40,000.00
2020 600,000.00 0.20 150,000.00 30,000.00
2021 400,000.00 0.13 150,000.00 20,000.00
2022 200,000.00 0.07 150,000.00 10,000.00
3,000,000.00 150,000.00
NONINTERESTBEARINGNOTE - PROPERTY (NOCASH PRICE) ; INSTALLMENT
 NO AGREED INTEREST,NO CASHPRICE
 COST OF PROPERTY= PRESENTVALUE
Illustration:
An entityacquired amachineryfor1M payable in5 equal annual payments.The prevailing
marketrate of interestis10%.
PV of 5 P200,000 = 3.7908
200,000 * 3.7908 = 758,160
ENTRY: Jan 1, 2018
Machinery 758,160
DiscountonNote Payable (1M – 758,160) 241,840
Note Payable 1,000,000
FIRST PAYMENT:
Note Payable 200,000
Cash 200,000

10. 10
10% PAYMENT - INT PV-PRINCIPAL
YEAR PAYMENT INTEREST PRINCIPAL PRESENT VALUE
1/1/2018 758,160
12/31/2018 200,000.00 75,816 124,184 633,976
12/31/2019 200,000.00 63,398 136,602 497,374
12/31/2020 200,000.00 49,737 150,263 347,111
12/31/2021 200,000.00 34,711 165,289 181,822
12/31/2022 200,000.00 18,182 181,818 -
NONINTERESTBEARINGNOTE - PROPERTY (NOCASH PRICE) ; LUMP SUM
Illustration:
An entityacquiredequipmentfor1M. The entitypaid100,000 downand the balance isdue
afterthree years.The prevailinginterestrate is10%. The PV of 1 for 3 periodsis.7513.
Downpayment 100,000
PresentValue (900,000*7513) (676,170)
Cost of Equipment 776,170
Face Value 900,000
PresentValue (676,170)
ImputedInterest 223,830
ENTRY: January1, 2018
Equipment 776,170
DiscountonNote Payable 223, 830
Cash 100,000
Note Payable 900,000
ENTRY: December31, 2018