Common Errors in Accounting for Bonds Payable

Some accountancy students find difficulty in accounting for bonds payable.  The concept of the payable itself really poses some complexities especially to those who are new with the financial accounting.  Here are the common errors committed by learners of accounting of bonds payable:

1. Wrong identification of whether the bonds are sold for a premium or sold for a discount.  Just remember the acronyms “end” and “nep”.  These mean that when the effective interest rate is higher than the nominal amount, then the bonds are said to be sold at a discount.  On the other hand if the nominal amount is higher than the effective interest then it is sold at a premium.

2. Wrong treatment of bond issue costs. Always remember that bond issue costs are not treated as outright expense but it is amortized over the life of the bond issue which is similar to the accounting for discount for bonds payable.

3. Wrong determination of total cash received in the bonds transaction. This is in case when the accrued interest are not considered when the problem indicates “an entity sells P4,000,000 face value bonds at P4,230,000 plus accrued interest. It should be the issue price plus the accrued interest is equal to total cash received. (Meanwhile as to retirement as to total cash payment, it would be the retirement price plus the accrued interest.)

4. Wrong determination of gain or loss on the retirement of the bonds. The gain or loss is the difference between the retirement price and the carrying amount of the bonds.  If the retirement price is higher than the carrying amount, there is a loss.  When what happens is the other way around, there is a gain.

5. Wrong computation of the present value of the bonds. This is especially true when using effective interest method of computing for the present value of bonds. There are no shortcuts, you should be really knowledgeable with the time value of money concept as you would still use this concept on the other accounting subjects.

You can take note of these common errors so that you will be warned on where you might commit it (as bonds payable are usually given in the CPA Board Examination). Still, studying hard is the key to success.  Remember that “sacrifice is temporary but success is forever”.