Junior Philippine Institute of Accountants and Auditors – United

Intermediate Accounting12
OVERVIEW form of a “deep discount” or huge
• ‌Bonds Payable discount from the face amount
• ‌Effective Interest Method
• ‌Compound Financial Instrument Initial Measurement
• ‌Notes Payable - Bonds payable not designated at fair value
• ‌Shareholders' Equity through profit or loss shall be measured
• ‌Retained Earnings initially at fair value minus transaction
• ‌Share-based Compensation costs that are directly attributable to the
issue of the bonds payable.
BONDS PAYABLE
- However, if the bonds are designated and
What is Bonds Payable? accounted for at fair value through profit
or loss, the bond issue cost are expensed
- are recorded when a company issues immediately
bonds to generate cash. As a bond issuer,
the company is a borrower. As such, the Subsequent Measurement
act of issuing the bond creates a liability. a. at amortized cost, using effective interest
Thus, bonds payable appear on the method
liability side of the company's balance b. at fair value through profit or loss
sheet.
- A formal unconditional promise, made Amortized cost of bonds payable
under seal, to pay a specified sum of - amount at which the bond liability is
money at a determinable future date and measured initially minus principal
to make periodic interest payment at a repayment, plus or minus the cumulative
stated rate until the principal sum is paid. amortization using the effective interest
method of any difference between the
Term and Serial Bonds face amount and the present value of the
a. Term bonds bonds with a ingle date of bonds payable.
maturity -
b. Serial bonds - bonds with a series of Illustration
maturity dates instead of a single one
On April 1, 2022, Mosaka Company issued at 99
Secured and unsecured: plus accrued interest,2,000 of 8% P1,000
a. Mortgage bonds - bonds secured by a Face Value bonds. The bonds are dated
mortgage on real properties January 1,2015, mature on January 1, 2032, and
b. Collateral trust bonds - secured by shares pay interest on January 1 and July1. The entity
and bonds of other corporations paid bond issue costs of P70,000. From the bond
c. Debenture bonds - unsecured or bonds issuance,what is the net cash received?
without collateral security
Solution:
Other types of bonds Issue Price
a. Convertible bonds - can be exchanged for (2,000 x 1,000 = 2,000,000 x 99%) 1,980,000₱
shared of the issuing entity Accrued Interest from
b. Callable bonds - may be called in for January 1 to April 1, 2022
redemption prior to the maturity date (2,000,000 x 8% x 3/12) 40,000
c. Guaranteed bonds - issued whereby TOTAL 2,020,000
another entity promises to make payment Bond issue cost (70,000)
if the borrower fails to do so Net cash received
d. Junk bonds - high-risk, high yield bonds from bond issuance 1,950,000
issued by entities that are heavily
indebted or otherwise in weak financial
condition
e. Zero-coupon bonds - bonds that pay no
interest but the bonds offer a return in the

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 Junior Philippine Institute of Accountants and Auditors – United
Intermediate Accounting12
EFFECTIVE INTEREST METHOD Examples of financial instrument
1. Cash in the form of notes and coins – This is a
Two kinds of interest rates financial asset of the holder or bearerand a
1. Nominal rate - coupon rate/ stated rate financial liability of the issuing government.
2. Effective rate - yield rate/ market rate
which is the actual rate or true rate 2. Cash in the form of checks – This is a financial
asset of the payee and a financial liability of the
Notes: drawer or issuer.
● Simply requires the comparison between
interest earned/interest income & 3. Cash in bank – This is a financial asset of the
interest received depositor and a financial liability of the
● IE/II – IR = Premium amort. or Discount depository bank
amort.
● IE/II = effective rate x carrying amount .4. Trade accounts – This is a financial asset of
● IR = nominal rate x face amount the seller as accounts receivable and a financial
liability of the customer or buyer as accounts
Illustration payable.

On January 1, 2019, an investor acquired 5. Notes and loans – This is a financial asset of
1,000,000 face amount bonds dated January 1, the lender or creditor as notes receivable on
2019. The bonds mature on December 31, 2020. loans receivable and a financial liability of the
borrower or debtor as notes payable or loans
The life of the bonds is 2 years and 8% interest is payable.
payable semiannually on June 30 and December
31. 6. Debt securities – This is a financial asset of the
investor and a financial liability of the issuer
The cost of the bonds is 964, 540, a price which
yields a 10% effective rate per year. .7. Equity securities – This is a financial asset of
the investor and an equity of the issuer
IR = 1M x 4% = 40T
II = 964,540 x 5% = 48,227 Financial liability
Discount Amortization = 48,227 – 40T = 8,227
CA = 964,540 + 8,227 = 972,767 A financial liability is any liability that is a
contractual obligation:
COMPOUND FINANCIAL INSTRUMENT
a. To deliver cash or other financial assets to
● Under PAS 32, paragraph 11, defines a another entity.
financial instrument as any contract that b. To exchange financial instruments with
gives rise to both a financial asset of one another entity under conditions that are
entity and a financial liability or equity potentially unfavorable
instrument of another entity.
● Thus, the term “financial instrument” Examples of financial liabilities
encompasses a financial asset, a financial
liability and equity instrument. Financial liabilities representing a contractual
obligation to deliver cash in the future include:
From the definition, the characteristics of a a. Trade accounts payable
financial instrument are: b. Notes payable
a. There must be a contract. c. Loans payable
b. There are at least two parties to the contract. d. Bonds payable
c. The contract shall give rise to a financial asset
of one party and financial liability or equity Nonfinancial liabilities.
instrument of another part
a. Item such as deferred revenue and
warranty obligations are not financial

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 Junior Philippine Institute of Accountants and Auditors – United
Intermediate Accounting12
liabilities because the outflow of If the financial instrument contains both a
economic benefits associated with them is liability and an equity component, PAS 32
the delivery of goods and services rather mandates that such components shall be
than a contractual obligation to pay cash accounted for separately. The approach in
or another financial asset. accounting for a compound financial
b. Liabilities, such as income taxes instrument is to apply “slip accounting”
payable that are created as a result
of statutory requirements imposed by Bonds payable issued with share
the government are not also financial warrants
liabilities.
c. Constructive obligations are not financial Share warrants are granted to enable the
liabilities because the obligations do not holders to acquire equity shares at a
arise from contracts. specified price during a definite
period.When the bonds are sold with
A contractual obligation to exchange under share warrants, the bondholders are given
potentially unfavorable conditions is an the right to acquire shares of the issuing
option written or issued by the issuer to sell shares entity at a specified price at some future
in a specified entity at less than market price. time
Thiscontractual obligation is a financial liability
Allocation of issue price
Equity instrument
- any contract that evidences a residual The bonds are assigned an amount equal
interest in the assets of an entity after to the “market value of the bonds
deducting all of its liabilities. It reflects ex-warrants”,regardless of the market
the basic accounting equation that equity value of the warrants. The residual
equals asset minus liability.Equity amount or remainder of the issue price
instruments include ordinary share shall then be allocated to the warrants
capital, preference share capital and
warrants or options. Illustration
An entity sells 5,000 10-year bonds, face
Compound financial instrument value P1,000, at 105. Each bond is
● Under PAS 32, paragraph 28, defines a accomplished byone warrant that permits
compound financial instrument as “a the bondholder to purchase 20 equity
financial instrument that contains both a shares, par P50, at P55 pershare, or a
liability and an equity element from the total of 100,000 share, 5,000 x 20.The
perspective of the issuer.” market value of the bond ex-warrant at
● In other words, one component of the the time of issuance is 98.
financial instrument meets the definition
of a financial liability and another 1.To record the issuance of the bonds:
component of the financial instrument
meets the definition of an equity Cash
instrument. (5,000,000 x 105) 5,250,000
Discount on
The common examples of compound financial bonds payable 100,000
instruments are as follows: Bonds payable 5,000,000
a. Bonds payable issued with share warrants Share warrants outstanding 350,000
b. Convertible bonds payable
Issue price of bonds with warrants
Accounting for compound instrument 5,250,000
- The issuer of a financial instrument Less: Market value of bonds ex-warrants
shall evaluate the terms of the (5,000,000 x 98) (4,900,000)
instrument whether it contains both a Residual amount allocated to warrants
liability and an equity component. 350,000

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 Junior Philippine Institute of Accountants and Auditors – United
Intermediate Accounting12
2. To record the exercise of 60% of the warrants: SHAREHOLDER’S EQUITY
Cash (60,000 shares x 55) 3,300,000
Share warrants outstanding Shareholders' equity or stockholders' equity
(60% x 350,000) 210,000 -It is the residual interest of owners in the net
Share capital assets of a corporation measured by the excess of
(60,000 shares x 50) 3,000,000 assets over liabilities
Share premium 510,000
DEFINITION OF TERMS
3. To record the expiration of the remaining
warrants: Share Capital
Share warrants outstanding 140,000 - Portion of the paid in capital representing
Share premium – the total par or stated value of the shares
unexercised warrants 140,000 issued

NOTES PAYABLE Subscribed Share Capital

- long-term liabilities that indicate the - Portion of the authorized share capital
money a company owes its that has been subscribed but not yet fully
financiers—banks and other financial paid and therefore still unissued
institutions as well as other sources of
funds such as friends and family. They are - It is reported minus subscription
long-term because they are payable receivable not collectible currently.
beyond 12 months, though usually within
five years. Share Premium
- portion of the paid in capital representing
Initial measurement: excess over the par or stated value
a. Not designated as FV Option (through Profit Broadly, the common sources of share
or Loss) = FV - Transaction Cost premiums are:
b. Irrevocably designated at FVPL = FV only a.Excess over par value or stated value
(Transaction Costs ate expensed immediately) b.Resale of treasury shares at more than cost
c.Donated capital
Subsequent measurement: d.Issuance of share warrants
a. At amortized cost using effective interest e.Distribution of share dividends
method f.Quasi-reorganization and recapitalization
b. At FVPL
Retained Earnings
1. Note issued solely for cash - Represent the cumulative balance of
Example periodic earnings, dividend distributions,
prior period errors and other capital
On November 1, 2020, an entity discounted its adjustments
own note of 1,000,000 at 12% for 1 year.” Step 1:
Note Payable 1,000,000 Less: Revaluation Surplus
Discount (1M x 12%) ( 120,000) Net - Excess of revalued amount over the
Proceeds 880,000 carrying amount of the revalued asset

Step 2: Entry Treasury Shares

Nov. 1 Cash 880,000 - Corporation's own shares that have been
Discount on Note payable 120,000 issued and then reacquired but not
(credit)Note Payable 1,000,000 canceled

Step 3:
Dec. 31 Deposits on Subscriptions
Interest Expense 20,000 - To a proposed increase in share capital
(credit) Discount on Note Payable 20,000 may be reported as part of shareholder's

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 Junior Philippine Institute of Accountants and Auditors – United
Intermediate Accounting12
equity as a separate line item in the privileges. The ordinary shareholders
shareholder's equity enjoy no preference over each other

Actually, the amount fixed in the articles of PREFERENCE SHARE CAPITAL

incorporation is called the authorized share Preference share is so called because of the
capital. preferences granted to the shareholders. The
preferences usually pertain to the preference
The share capital is divided into shares shareholders' claims on dividends net assets in
evidenced by a share certificate. the event of liquidation

Share Represents the interest or right of a LEGAL CAPITAL

shareholder in the corporation. Legal Capital- portion of the paid in capital
arising from issuance of share capital which
The four rights of a shareholder are: cannot be returned to the shareholders in any
a.To share in the earnings of the corporation form during the lifetime of the corporation
b.To vote in the election of directors and in the
determination of certain corporate policies ● In the case of par value share, legal capital
c.To subscribe for additional share issues - This is the aggregate par value of the shares
is the right of preemption or share right issued and subscribed. b.In the case of
d.To share in the net assets of the corporation no-par value share, legal capital is the
upon liquidation total consideration received from
shareholders including the excess over
Share Certificate- the instrument or document the stated value
that evidences the ownership of a share
ACCOUNTING FOR SHARE CAPITAL
As a general rule, a share certificate is issued a.Memorandum Method -
only when the subscription is fully paid. No entry is made to record the authorized
share capital. Only a memorandum is made for
The share capital may be par value shares-par the total authorized share capital. When share
value share. capital is issued, it is credited to the share capital
account.
Par Value Share - one with specific value fixed in
the articles of incorporation and appearing on b.Journal Entry Method-
the share certificate. The authorization to issue share capital is
-its purpose is to fix the minimum issue price of recorded by debiting unissued share capital and
the share crediting authorized share capital. When share
capital is issued, it is credited to the unissued
No-Par Share - one without any value appearing share capital account.
on the face of the share certificate.
A share is simply called part because it ILLUSTRATION - MEMORANDUM METHOD
has no par value appearing on the face of the
share certificate. But a no-par share has always 1.An entity was authorized to issue share capital
anissued valued or stated value based on the of P4,000,000, divided into 40,000 shares with
consideration for which it is issued. The par value of P100.
Minimum consideration for issue price for
no-par share as provided for in the Revised Memo entry- The entity was authorized to issue
Corporation Code is₱5. In other words, a no-par share capital of P4,000,000, divided into 40,000
share cannot be issued for less than₱5 shares with par value of P100.

ORDINARY SHARE CAPITAL 2.Received subscription to 10,000 shares at par.

- If there is only one class of share capital, it Subscription receivable 1,000,000
necessarily is ordinary shares. Ordinary Subscribed share capital 1,000,000
share is so called because the ordinary
shareholders have the same rights and

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 Junior Philippine Institute of Accountants and Auditors – United
Intermediate Accounting12
3.Collected 25% on the above subscription. 1.Unissued share capital 4,000,000
Cash250,000 Authorized share capital 4,000,000
Subscription receivable 250,000 2.Subscription Receivable 1,000,000
Subscribed share capital 1,000,000
4.Received Full Payment For 6,000 shares 3.Cash250,000
originally subscribed. Subscription receivable 250,000 4.Cash450,000
Subscription receivable 450,000
Cash 450,000 5.Subscribed share capital 600,000
Subscription receivable 450,000 Unissued share capital 600,000

Here lies the difference between the journal

Subscription price (6,000 x 100) 600,000 entry method and memorandum method . The
Partial payment (25% x 600,000)(150,000) issuance of share capital is credited to the
Balance 450,000 unissued share capital account under the journal
entry method
5 .Issued the share certificates for 6,000 shares
which are fully paid. 6.Cash 500,000
Unissued share capital 500,000
Subscribed share capital 600,000
Share capital 600,000 RETAINED EARNINGS
● Retained earnings represent the
cumulative balance of periodic net income
The Revised Corporation Code provides that or loss, dividend distributions,prior
shares are issued only when subscriptions are period errors, effects of change in
fully paid. accounting policy and other capital
adjustments
6.Received a cash subscription for 5,000 shares ● Under IAS, the term for retained earnings
at par. is accumulated profitsWhen the retained
earnings account has a debit balance, it is
Cash600,000 called a “deficit
Share capital 600,000
Retained earnings can be classified into two
A cash subscription is directly credited to the namely:
share capital account. It is not necessary to set
up a subscription receivable account. a. Unappropriated retained earnings represent
that portion which is free and can be declared as
dividends to stockholders.
Statement Presentation b. Appropriated retained earnings represent that
If a statement of financial position is prepared, portion which is restricted and therefore not
the share capital would be shown under available for any dividend declaration
shareholders' equity.
What are dividends?
Share capital, P100 par, 40,000 ● Dividends are distribution of earnings or
shares authorized, 11,000 capital to shareholders in proportion to
shares issued 1,100,000 their shareholdings
Subscribed share capital, 4,000 shares 40,000 ● Dividends out of earnings can be declared,
Subscription receivable(300,000) only from retained earnings
Shareholders' equity 1,200,000 ● If the entity has a deficit, it is illegal to pay
dividendsThe common forms of dividends
‘ out of earnings are cash dividend,
ILLUSTRATION - JOURNAL ENTRY METHOD property dividend and share dividend
Assume the same information in the previous ● Dividends out of capital are distributions
illustration of capital to shareholders in proportion to
their shareholdings

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Intermediate Accounting12
● Such dividends are popularly known as the par or stated value is
liquidating dividends capitalized because this
isconceived to materially
When are dividends recognized? effect a reduction in the
share market value. Share
● Under IFRIC 17 “Distribution of noncash dividends of 20% or more
assets to owners” paragraph 10, the is considered as large share
liability to pay dividend shall be dividend\
recognized when the dividend is b. If the share dividend is less
appropriately authorized and is no longer than 20% the fair value of
at the discretion of the entity,which is the the share on the date of
date: declaration is
a. When the dividends are declared by capitalized.However, if the
management or the board of directors if the local fair value is lower than the
jurisdiction does not require further approval par or stated value, the par
b. When the declaration of dividend by or stated value is
management or the board of directors is capitalized. If the fair value
approved by relevant authority, for example, the is higher than par or stated
shareholders, if the local jurisdiction requires value, the difference is
such approval credited to share premium
from share dividend. Share
What is a share dividend? dividend of less than 20% is
● The IAS term for share dividend is “bonus considered a small share
issue” dividend
● Share dividend is distribution of the
earnings of the entity in the form of the SHARE-BASED COMPENSATION
entity’s own shares Share Options
● When share dividend is declared, the ● Is a compensation established by the
retained earnings of the entity are in entity whereby the entity’s employees
effect capitalized or transferred to share shall receive shares of capital
capital ● in exchange for their services or incurs
● The assets of the entity remain the same liability to the employees in amounts
before and after the issuance of the share ● Based on the price of its shares
dividend ● Based onFair Value or Market Value of the
● Share dividend payable is not a liability shares
but an addition to the share capital in the ● Common feature of Remuneration
shareholders’ equity for:Directors, Seniors Executives and
other key employees
When share dividends are declared, what ↑Price of the Shares
amount of retained earnings should be ↑Net Income -To motivate employees
capitalized or what amount should be
debited to retained earnings? 2 Kinds of Share Based Components:
1. Equity Settled -Issue equity
● The IFRS does not address share instruments:like Preference share.
dividends, -Share Options
● Thus the guidance is based on the -In consideration for services receive
Philippine GAAP in accounting for share Share Options Outstanding Account
dividends. reported as part: of
a. If the share dividend is Share Premium
20% or more, the par or
stated value is capitalized 2. Cash Settled
or debited to retained -Incurs a liabilities
earnings. If the share -Share Appreciation Rights
dividend is 20% or more, -Liabilities is based on equity instruments

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 Junior Philippine Institute of Accountants and Auditors – United
Intermediate Accounting12
Total Compensation Expense oExpense over the
EQUITY SETTLED:SHARE OPTIONS vesting period

● Equity Instrument is given

Optional
Exercise Price<Fair Value Shares Granted to
officers and key employees
● To enable them to acquire shares of the
entity
● During a specified period upon fulfillment
of a certain conditions at a specified price
● Granted to officers and key employee As
part of their Remuneration Package
● Addition Compensation:to the Cash Salary
and other employee benefits

SHARE OPTIONS
2 Measurement Methods:
1.Fair Value Method
-Fair Value Of Option set the date of grant
date
-Fixed Price
-Mandated by IFRS 2

2.Intrinsic Value Method

-Fair Value of Shares less Options Price
-Excess of MV of the Shares over the Option Price
-Change over time
-Computed every year

-Re-measure the Compensation expense at the

date of settlement

Fair Value of Shares (Options Price)

- Can be used only if the fair value of the
share option cannot be estimated reliably
-
Recognition of Compensation
- 1.So Vest Immediately -
- Do not require to complete a
specified period of service (or
Vesting Period)
- -Before unconditionally entitled to
the share options
- -Can exercise share options
immediately [ Date Grant ] Total
Compensation Expense–in full

2.Do Not Vest Immediately

-Require to complete a specified period of
service (or Vesting Period)
-Before unconditionally entitled to the share
options [ Date Grant--Exercise date ]

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