Documente Academic
Documente Profesional
Documente Cultură
Objectives
1. 2.
To describe long-term liabilities and describe how they are valued To identify the nature and types of long-term liabilities-bond
3.
4.
5.
Long-Term Liabilities
Consists of present obligations not payable within the operating cycle of the business, or a year whichever is longer. Long-term creditors have no vote in management affairs and only receive a stated rate of interest regardless of the level of earnings. Covenants or restrictions, for the protection of both lenders and borrowers, are stated in the bond indenture or note agreement Example: Bond payable, Long-term notes payable, Long-term loans, mortgages payable
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FINANCIAL LIABILITY
MFRS 132 defined as any liability that is:
(a)
a contractual obligation:
i. to deliver cash or other financial asset to another entity; or ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
a contract that will or may be settled in the entitys own equity instruments and is:
i.
a non-derivative for which the entity is or may be obliged to deliver a variable number of the entitys own instrument; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of entitys own equity instrument.
ii.
Bonds Payable
Arises from a contract known as a bond indenture. Represents a promise to pay the principle(face value) at maturity and periodic interest based on the stated interest rate and the face value of the bond
Bonds Payable
Bond contract known as a bond indenture.
Purpose is to borrow when the amount of capital needed is too large for one lender to supply.
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Cagamas MBS Berhad Petronas Capital Limited AmBank (M) Berhad Asian Development Bank
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When a bond sells at a premium, the difference between the sales price and the face value is credited to Premium on Bonds Payable. This is an adjunct account to Bonds Payable. Dr. Cash Cr. Bond Payable xx xx
xx
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c) 105
Prepare journal entries for CINB Bhd.
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Solution (000):
at 100 (at par) at 97 (at discount) at 105 (at premium) Dt Cash Kt Bonds Payable 200
200
Dt Cash 194 Dt Disc. bonds 6 Kt Bonds Payable 200 Dt Cash 210 Kt Bonds Payable 200 Kt Premium Bonds 10
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Issuance of Bonds-
Occur when rate employed by buyer is differs from stated rate. Example 2: RHD Bhd issues RM300,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.
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The price of a bond is determined by the interaction between the bond's stated interest rate and its market rate. If
a) the stated rate = the market rate, sell at par. b) the stated rate < the market rate, sell at a discount. c) the stated rate > the market rate, sell at a premium.
Term: Stated rate = contract rate Market rate = yield/effective interest rate
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Valuation of Bonds
Interest Rates
Stated, coupon, or nominal rate = The interest rate written in the terms of the bond indenture.
Market rate or effective yield = rate that provides an acceptable return on an investment commensurate with the issuers risk characteristics. Rate of interest actually earned by the bondholders.
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Effective interest method is the preferred procedure used to calculate periodic interest expense. The carrying amount of the bonds at the start of the period is multiplied by the effective interest rate to determine the interest expense.
Straight-line method may be used if the results are not materially different from those produced by the effective interest method.
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2.
XX XX
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Issuance of bonds
612,000
600,000 12,000 29,700 300
30,000
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29,700 300
30,000
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i=11.5/2, n=20x2
PV 600,000 x 0.10685 PVOA 30,000 x 15.5330 Price on 1 Jan Dr Cash Dr Discount on bond Cr Bonds payable = 64,110 = 465,990 = 530,100 530,100 69,900 600,000
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1/7/12 1/1/13
30,000 30,000
1/7/13
30,000
30538
538
531,627
Interest expense on 1 July 2012 Dr Interest expense Cr. Discount on Bond Cr. Cash 30,481 481 30,000
c)
Interest expense on 31 December 2012 Dr Interest expense Cr Discount on Bond Cr. Interest payable 30,508
508 30,000
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Legal and accounting expense, administrative expense (printing doc/prospectus), underwriting fees.
These costs do NOT represent an asset Methods of recognition: 1) As an expense charge to income statement immediately 2) Capitalized & amortized debited to a deferred charge account & amortize over bond period
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1/1/12: to record the issuance of the bond Dt Cash 39,000,000 Dt Deferred bond issue cost 1,000,000 Kt Bonds Payable 40,000,000
b)
31/12/12 : to recognize amortization of deferred charge Dt Amortization expense 200,000 Kt Deferred bond issue cost 200,000 to recognize interest expense Dt Interest expense Kt Cash 4,000,000 4,000,000
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When bonds are issued between interest dates, the purchase price is increased by an amount equal to the interest earned on the bonds since the last interest payment date. Buyers will pay the seller the interest accrued from the last interest payment date to the date of issue. Cash paid by buyer is the price of the bonds together with the accrued interest. Price of bonds is the present value of the bond at the date of issue.
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On the next interest payment date, the bondholder will receives the entire interest payment. However, the amount of interest expense to the issuing corporation is the difference between the interest payment and the amount of interest prepaid by the purchaser.
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Example 6
Cumi Bhd purchased bond from Ciki Bhd. The following is the information on the bond.
Date of bond Maturity date June 30, 2009 June 30, 2014
Sept 1, 2009
Dec 31 and June 30 9% RM200,000
(-) Cash paid for interest from 30/6 1/9 [200,000 x 9% x 2/12] PRICE OF BOND AT 1/9/2009
203,0001
3,0002 200,000
3,000 6,0001
9,000
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188,3151 14,6852
3,0003 200,000
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30/6/09
31/12/09 30/6/10
9,000 9,000
10,171 10,235
1,171 1,235
184,925
186,096 187,331
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6,7811 3,000
7812 9,000
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RETIREMENT OF BONDS
Before the maturity date Examples of bonds retirement: 1. Refunding 2. Convertible Bond 3. Callable Bond At the maturity date If bond is retired at the maturity date, no profit or loss is recorded Carrying Amount of Bond = Face Value of Bond Journal entry for payment made at the maturity date: Dr Bonds Payable XX Interest expense XX Cr Cash XX Discounts on Bonds Payable XX 41
Refunding
At the retirement, all records on bonds and any related records to the old bond will be eliminated. Interest expense and amortisation of discount/premium needs to be recorded in advance until the retirement date.
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Example 7
On January 1, 2008, Wira Bhd issued RM100,000, 10-year bond at par and with stated interest rate of 5% paid every 30/6 and 31/12. On January 1, 2012, the buyer agreed to receive bond of RM90,000, 20-year, with stated interest rate of 8% paid at the same dates. Market interest rate is 8%. Prepare journal entries for issuance of bond and refunding.
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1/1/08
At refunding Value of new issuance of bond = RM90,000 (at par) 1/1/12 Dr Bonds Payable,5% 100,000 Cr Bonds Payable,8% 90,000 Cr Gains from retirement 10,000
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Callable Bonds
Normally the bond is repaid at the maturity date. CAN be repaid at any time if it is called up. Normally the bond is callable when the market interest increase due to lower callable price. At the callable date, the company should record all interest expense and amortise the discount/premium until that date.
When the bond is callable, it is retired. Thus, all record of the bonds and any related to it will be eliminated.
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Example 9
On 1 January 2004, Beztax Bhd issued bonds with a par value of RM800,000 at 97, due in 20 years. Bond issue cost totalling RM16,000 were incurred. Eight years after the issuance, the entire issue is called at 101 and canceled. Discount on bond payable and bond issue cost are amortized using straight-line basis.
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776,000 32,000
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Bond Payable
Loss on redemption Discount on Bond
800,000
32,000 14,400
9,600
808,000
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Hybrid Securities:
Securities or financial instruments that have characteristic of both debt and equity. They often combine traditional and derivative financial instruments
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Are classified by the issuer according to substance of contractual arrangement and the definition of a financial liability and an equity instrument. Their components are classified separately as financial liabilities, financial assets or equity instruments. Example: Covertible bond payable
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Convertible Bonds
Bonds can be converted into shares Reasons for conversion: to increase the equity capital without giving up more ownership control. to make the bond marketable Purchased by investors who desire the security of a bond holding-guaranteed interest-plus the added option of conversion if the value of the shares appreciates significantly.
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Convertible Bonds
Entries for issuing of the bonds MFRS 132 para 29, require separate recognition of the equity and liability component A bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into 52 a fixed number of ordinary shares of the entity
Journal entry:
Dr Cash 525,000 Discounts on bonds payable 20,000 Cr Bonds payable 500,000 Premium on shares 45,000
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Issued with the condition that the company can buy back the shares at a specified date in the future The terms of redemption will be stated in the Articles of Association If it provide a mandatory redemption or where the option of redemption is exercisable by the shareholders SHOULD be classified as a financial liability.
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Redeemable preference share on which dividends are non-cumulative and at the discretion of the issuer are compound instruments. The present value of the redemption value is a liability, the unwinding of the interest is expense, dividends paid relate to the equity are recognised as distribution of equity.
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2.
Mandatory converted
Faced value of ICULS will be converted into new ordinary shares based on stipulated conversion ratio
Exercise: ICULS
On 1 Jan 2008, DRG Bhd issues RM1 million ICULS 2008/2012 value at RM1.00 per ICULS. The five-year ICULS paid 7.5% coupon per year. This ICULS can be converted into ordinary shares based on conversion ratio of RM5 ICULS for one new shares (RM1.00, par)
Solution:
At Issuance DR Cash CR ICULS 1,000,000
1,000,000
At Conversion (maturity date) RM1 million ICULS = # shares? New shares = 1,000,000 5 = 200,000 units shares DR ICULS 1,000,000 CR Ordinary shares 200,000 CR Premium on shares 800,000
The accounting treatment and presentation of interest, dividends, losses and gains depend on whether the items are related to liability or equity.
If they relate to liability, they should be reported in the income statement as expense or income such interest on bonds If they relate to equity instrument, they should be recorded directly to the statement of changes in equity.
BKAF3063
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Changes in equity: Dividends on equity shares are disclosed in the statement of changes in equity. Transaction cost on equity transactions such as registratin and professional fees, stamp duties and printing costs on the issue or share buy back are deducted from equity.
BKAF3063
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Purpose:
To enhance understanding of the significance of financial instrument to the entitys financial position, performance and cash flows. To assist in assessing the amounts, timing and certainty of future cash flows associated with those instruments
Provide information to the extent of risk related to financial instrument
BKAF3063
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total interest income and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through profit or loss; fee income and expense (other than amounts included in determining the effective interest rate) arising from:
(c)
(i) financial assets or financial liabilities that are not at fair value through profit or loss; and
END OF TOPIC 1
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