war22ech15bonds payable and investments bonds indonesia

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Adeng Pustikaningsih, M.Si.

Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi

Universitas Negeri Yogyakarta

CP: 08 222 180 1695

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Bonds Payable

and Investments

in Bonds

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1.

Compute the potential impact of

long-term borrowing on earnings per share.

2.

Describe the characteristics,

terminology, and pricing of bonds

payable.

3.

Journalize entries for bonds payable.

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4.

Describe and illustrate the payment

and redemption of bonds payable.

5.

Journalize entries for the purchase,

interest, discount and premium

amortization, and sale of bond

investments.

6.

Prepare a corporation balance sheet.

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5

Compute the potential

impact of long-term

borrowing on the

earnings per share of a

corporation.

Objective 1

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Financing Corporations 15-1

A

bond

is simply a form of an

interest-bearing note. Like a

note, a bond requires periodic

interest payments, and the

face amount must be repaid at

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7 Plan 1 Plan 2 Plan 3

Issued 12% bonds -- -- Rp2 billion

Issued 9% preferred

stock, Rp50,000 par value -- Rp2 billion Rp1 billion Issued common stock,

Rp10,000 par value Rp4 billion Rp2 billion Rp1 billion Rp4 billion Rp4 billion Rp4 billion

15-1

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8 7

15-1

Effect of Alternative Financing Plans—

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15-1

Effect of Alternative Financing Plans—

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Example Exercise 15-1

PT Gilang., is considering the following alternative plans

for financing their company (in „000 Rp):

9 Plan I Plan II Issue 10% Bonds (at face) Rp2,000,000 Issue Rp10 Common Stock Rp3,000,000 Rp1,000,000

Income tax is estimated at 30% of income.

Determine the earnings per share of common stock under the two alternative financing plans, assuming income

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11 For Practice: PE 15-1A, PE 15-1B

Follow My Example 15-1

10 Earnings before bond interest

and income tax Bond interest Balance

Income tax Net income

Dividend on preferred stock Earnings available for

common stock

Number of common shares Earnings per share on

common stock Rp750,000 200,000 Rp550,000 165,000 Rp385,000 0 Rp385,000 /100,000 Plan II Rp3,850

(2,000,000 x 10%) (550,000 x 30%) Rp750,000 0 Rp750,000 225,000 Rp525,000 0 Rp525,000 /300,000 Plan I Rp1,750

(750,000 x 30%)

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Describe the

characteristics,

terminology, and

pricing of bonds

payable.

Objective 2

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15-2

Bonds Payable

 A corporation that issues bonds enters into

a contract (called a bond indenture or trust

indenture) with the bondholders.

 Usually, the face value of each bond, called

the principal, is Rp1,000,000 or a multiple of Rp1,000,000.

 Interest on bonds may be payable annually,

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

When all bonds of an issue mature at

the same time, they are called

term

bonds

.

15-2



If the maturity dates are spread over

several dates, they are called

serial

bonds

.

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15



Bonds issued on the basis of the

general credit of the corporation are

debenture

bonds

.

15-2



Bonds that a corporation reserves the

right to redeem before their maturity

are called

callable bonds

.

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15-2

Pricing of Bonds Payable

When a corporation issues bonds, the price that buyers are willing to pay depends upon three factors:

1. The face amount of the bonds, which is the

amount due at the maturity date.

2. The periodic interest to be paid on the bonds.

This is called the contract rate or the coupon

rate.

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15-2

The market or effective rate of interest is determined by transactions between buyers and sellers of similar bonds. The market rate of interest is affected by a variety of factors, including:

1. investors assessment of current economic

conditions, and

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MARKET RATE = CONTRACT RATE

Selling price of bond = Rp1,000,000

Rp1,000,000

10% payable annually

15-2

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19 18

MARKET RATE > CONTRACT RATE

Selling price of bond < Rp1,000,000

–

Discount

Rp1,000,000

15-2

If the market rate is higher than the contract rate,

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20 19

MARKET < CONTRACT RATE

Selling price of bond > Rp1,000,000

+

Premium

Rp1,000,000

15-2

If the market rate is lower than the contract rate,

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15-2

Time Value of Money

The time value of money

concept recognizes that an

amount of cash to be received

today is worth more than the

same amount of cash to be

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22

Today End of

Year 1 End of Year 2

Rp1,000,000 x 0.82645 Rp826,450

15-2

Present Value of the Face Amount of Bonds

Rp1,000, 000

21 A Rp1,000,000, 10% bond is purchased. It pays

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23 22

Using Exhibit 3 in your test, what is the present value of Rp4,000,000 to be received in 5 years, if the market rate of interest is 10% compounded annually?

For Practice: PE 15-2A. PE 15-2B

Rp4,000,000 x .62092* = Rp2,483,680

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Today End of

Year 1 End of Year 2 Interest payment Rp100,000 Interest payment Rp100,000

Rp90,910 Rp100,000 x 0.90909 Rp82,64

0

Rp100,000 x 0.82645

15-2

Present Value of the Periodic Bond Interest Payments

23

Present value, at 10%, of Rp100,000 interest payments to be received each year for 2 years (rounded)

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25 24

15-2

Present Value of 2-Year, 10% Bond

Present value of face value of Rp1,000,000 due in 2 years at 10% compounded annually:

Rp1,000,000 x 0.82645 (Exhibit 3: n = 2,

i = 10%)(Slide 21) Rp 826,450

Present value of 2 annual interest payments

of 10% compounded annually: Rp100,000 x 1.73554 (Exhibit 4: n = 2, i = 10%)

(Slide 23) 173,550

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26

Calculate the present value of a

Rp20,000,000, 5%, 5-year bond that pays Rp1,000,000 (Rp20,000,000 x 5%) interest annually, if the market rate of interest is 5%. Use Exhibits 3 and 4 for computing present values.

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26 Present value of face value of

Rp20,000,000 due in 5 years at 5%

compounded annually: Rp20,000,000 x .78353 (present value factor of

Rp1 for 5 periods at 5%) Rp15,671,000*

Present value of 5 annual interest payments of Rp1,000,000 at 5%

interest compounded annually: Rp1,000,000 x 4.32948 (present value of annuity of Rp1 for 5 periods at 5%).

*Rounded to the nearest rupiah

4,329,000*

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28

Journalize entries for

bonds payable.

Objective 3

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On January 1, 2007, a

corporation issues for cash

Rp100,000,000 of 12%,

five-year bonds; interest payable

semiannually. The market rate

of interest is 12%.

15-3

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30

15-3

Present value of face amount of

compounded annually: Rp100,000,000 x 0.55840 (Exhibit 3: n = 10, i = 6%)

Rp 55,840,000

Present value of 10 interest payments of Rp6,000,000 at 12% compounded

semiannually: Rp6,000,000 x 7.36009 (Exhibit 4: n = 10; i = 6%)

44,160,000*

Total present value of bonds Rp100,000,000

*Because the present value tables are rounded to five decimal

places, minor rounding differences may appear in this illustration.

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31 30

On January 1, 2007, a corporation issues for cash Rp100,000,000 of 12%, five-year bonds; interest payable semiannual. The market rate of interest is

12%.

15-3

Issued Rp100,000,000 bonds payable at face amount.

Bonds Payable 100 000 000

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32 31

On June 30, an interest payment of Rp6,000,000 is made (Rp100,000,000 x .12 x 6/12).

15-3

June 30 Interest Expense 6 000 000

Cash 6 000 000

Paid six months‟ interest on

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33 32

The bond matured on December 31, 2011. At this time, the corporation paid

the face amount to the bondholder.

15-3

Cash 100 000 000

Paid bond principal at maturity date.

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34

Assume that the market rate of

interest is 13% on the

Rp100,000,000 bonds rather than

12%. What would be the present

value of these bonds?

15-3

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35 34

15-3

compounded semiannually: Rp100,000,000

x 0.53273 Rp53,273,000

Present value of 10 interest payments of Rp6,000,000, at 13% compounded

semiannually: Rp6,000,000 x 7.18883 (present value of annuity of Rp1 for 10

periods at 6%)

43,133,000

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36 35

On January 1, 2007, the firm issued

Rp100,000,000 bonds for Rp96,406,000 (a discount of Rp3,594,000).

Issued Rp100,000,000 bonds at discount.

Jan. 1 Cash 2007 96 406 000

15-3

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On the first day of the fiscal year, a company issues a Rp1,000,000,000, 6%, 5-year bond that pays

semi-annual interest of Rp30,000,000

(Rp1,000,000,000 x 6% x ½), receiving cash of Rp845,562,000. Journalize the entry to record the issuance of the bonds.

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Cash 845,562,000

Discount on Bonds Payable 154,438,000

Bonds Payable 1,000,000,000

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15-3

Amortizing a Bond Discount

There are two methods of amortizing a bond discount:

1) The straight-line method and

2) The effective interest rate method,

often called the interest method.

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39 38

On June 30, 2007, six-months‟ interest is paid and

the bond discount is amortized (Rp3,594,000 x 1/10) using the straight-line method.

Discount on Bonds Payable 359 400

June 30 Interest Expense 6 359 400

2007

15-3

Amortizing a Bond Discount

Cash 6 000 00

Paid semiannual interest and amortized 1/10 of bond

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40

Using the bond from Example Exercise 15-4, journalize the first interest payment and the amortization of the related bond discount.

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For Practice: PE 15-5A, PE 15-5B

Interest Expense 45,443,800

Cash 30,000,000

Paid interest and amortized the bond discount (Rp154,438,000 † 10).

Click on this button to go to Example Exercise 15-4.

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41

If the market rate of interest is 11%

and the contract rate is 12%, on the

five year, Rp100,000,000 bonds,

the bonds will sell for

Rp103,769,000.

15-3

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42 41

15-3

compounded semiannually: Rp100,000,000 x 0.58543 (Exhibit 3: n =10, i = 5½%)

Rp 58,543,000

Total present value of bonds Rp103,769,000

Present value of 10 interest payments of Rp6,000,000 at 11% compounded

semiannually: Rp6,000,000 x 7.53763 (Exhibit 4: n = 10, i = 5½%)

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43 42

Issued Rp100,000,000 of bonds for Rp103,769,000 (a premium of

Rp3,769,000). The entry to record this information is as follows:

Issued Rp100,000,000 bonds at a premium.

Premium on Bonds Payable 3 769 000

Jan. 1 Cash 103 769 000

2007

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A company issues a Rp2,000,000,000, 12%, 5-year bond that pays semiannual interest of

Rp120,000,000 (Rp2,000,000,000 x 12% x ½),

receiving cash of Rp2,154,435,000. Journalize the bond issuance.

43

Cash 2,154,435,000

Premium on Bonds Payable 154,438,000 Bonds Payable 2,000,000,000

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45 44

On June 30, 2007, paid the semiannual interest and amortized the premium. The

firm uses straight-line amortization.

Paid semiannual interest and amortized 1/10 of bond prem.

Cash 6 000 000

June 30 Interest Expense 2007 5 623 100

Rp3,769,000 x 1/10

Amortizing a Bond Premium 15-3

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46

Using the bond from Example Exercise 15-6 (Slide 43), journalize the first interest payment and the amortization of the related bond premium.

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Interest Expense 104,556,000

Premium on Bonds Payable 15,444,000

Bonds Payable 120,000,000

Paid interest and amortize the

bond premium (Rp154,435,000/10).

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47 46

Zero-coupon bonds do not provide for interest payments. Only the face amount is paid at maturity.

Assume that the market rate is 13% at date of issue.

Zero-Coupon Bonds 15-3

Present value of Rp100,000,000 due in 5 years at 13% compounded semiannually: Rp100,000,000 x 0.53273 (PV of Rp1 for

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48 47

On January 1, 2007, issue 5-year, Rp100,000,000 zero-coupon bonds when the market rate of interest is 13%.

Issued Rp100,000,000 zero-coupon bonds.

Jan. 1 Cash 53 273 000

2007

Discount on Bonds Payable 46 727 000

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49

Describe and illustrate

the payment and

redemption of bonds

payable.

Objective 4

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Since the payment of bonds

normally involves a large amount

of cash, a bond indenture may

require that cash be periodically

transferred into a special cash

fund, called a

sinking fund

, over

the life of the bond issue.

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51

Bond Redemption 15-4

A corporation may call or redeem

bonds before they mature.

Callable

bonds

can be redeemed by the

issuing corporation within the

period of time and the price stated in

the bond indenture. Normally, the

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52 51 Retired bonds for $24,000.

Cash 24 000 000

Gain on Redemption of Bonds 2 000 000 June 30 Bonds Payable 2007 25 000 000

On June 30, a corporation has a bond issue of Rp100,000,000 outstanding on which there is an

unamortized premium of Rp4,000,000. The corporation purchases one-fourth of the bonds for

Rp24,000,000.

15-4

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15-4

Cash 105 000 000

June 30 Bonds Payable 2007 100 000 000 Premium on Bonds Payable 4 000 000 Loss on Redemption of Bonds 1 000 000

Redeemed Rp100,000,000 bonds for Rp105,000,000.

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A Rp500,000,000 bond issue on which there is an unamortized discount of Rp40,000,000 is redeemed for Rp475,000,000. Journalize the redemption of the bonds.

Bonds Payable 500,000,000

Loss on Redemption of Bonds 15,000,000

Cash 475,000,000

For Practice: PE 15-8A, PE 15-8B

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55

Journalize entries for

the purchase, interest,

discount, and premium

amortization, and sale

of bond investments.

Objective 5

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56

Bonds may be purchased either

directly from the issuing

corporation or through an

organized bond exchange. Prices

for bonds are quoted as a

percentage

of the face amount.

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57 56

On April 2, 2007, an investor purchases a Rp1,000,000 PT Ludiro Madu bond at 102 plus a brokerage fee of

Rp5,300 and accrued interest of Rp10,200.

15-5

Cash 1 035 500

Apr. 2 Investment in PT Ludiro Madu. Bonds 1 025 300

2007

Interest Revenue 10 200

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Cash 1 035 500

Apr. 2 Investment in PT Ludiro Madu Bonds 1 025 300

2007

Invested in a PT Ludiro Madu bond.

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On April 2, 2007, an investor purchases a

Rp1,000,000 PT Ludiro Madu bond at 102 plus a brokerage fee of Rp5,300 and accrued interest of

RP10,200.

15-5

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15-5

On July 1, 2007, PT Cahaya. purchases Rp50,000,000 of 8% bonds of PT Ditho due in 8 3/4 years. The effective interest

rate is 11%. The purchase price is

Rp41,706,000 plus interest of Rp1,000,000 accrued from April 1, 2007 (Rp50,000,000

x 8% x 3/12).

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60 59

Interest Revenue 1 000 000

Cash 42 706 000

Purchased investment in bonds, plus accrued

interest.

July 1 Investment in PT Ditho. Bonds 2007 41 706 000

15-5

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61 60

PT Cahaya received semiannual interest for April 1 to October 1 (Rp50,000,000 x 8% x 6/12).

15-5

Received semiannual interest for April 1 to October 1.

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62 61

Adjusting entry for interest accrued from October 1 to December 31 (Rp50,000,000 x 8% x 3/12).

15-5

Dec. 31 Interest Receivable 1 000 000 Adjusting entry for interest

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63 62

Adjusting entry for amortization of discount for July 1

to December 31: (Rp50,000,000 –Rp41,706,000)/105

= Rp79,000 (rounded) x 6 months.

15-5

31 Investment in PT Ditho Bonds 474 000 Adjusting entry for

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64 63

15-5

Interest Revenue

Oct. 1 2,000,000

Dec. 31 Adj.1,000,000 31 Adj. 474,000

2,474,000

July 1 1,000,000

Adj. Bal.

The effect of these entries on Interest Revenue is as

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PT Ditho bonds are sold for

Rp47,350,000 plus accrued interest

on June 30, 2014. The

carrying

amount

of the bond as of January

1, 2014 is Rp47,868,000

[Rp41,706,000 + (Rp79,000 per

month x 78 months)].

15-5

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66 65

It has been six months since the last

amortization entry, so amortization for this period is recorded (6 months).

15-5

June 30 Investment in PT Ditho Bonds 474 000

2014

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The next slide shows the

Investment in PT Ditho.

Bonds

account after all

amortization entries have

been made, including the

June 30, 2014 adjusting

entry.

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Investment in PT Ditho Bonds

July 1 41,706,000 Dec. 31 474,000 Dec. 31 948,000 Dec. 31 948,000 Dec. 31 948,000 Dec. 31 948,000 Dec. 31 948,000 Dec. 31 948,000

June 30 474,000

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This investment is sold on June 30, 2014 for Rp47,350,000 plus accrued interest of $1,000

(Rp50,000,000 x 8% x 3/12) .

15-5

30 Cash 48 350 000

Loss on Sale of Investments 992 000

Investment in PT Ditho Bonds 48 342 000 Received interest and

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On October 1, 2008 PT Gema Persada purchases

Rp10,000,000 of 6% bonds of PT Gaung Negeri due in 9¼ years. The bonds were purchased at a price of Rp8,341,000 plus interest of Rp150,000

(Rp10,000,000 x 6% x 3/12) accrued from July 1,

2008, the date of the last semiannual interest payment.

69 a. Journalize the purchase of the bonds plus

accrued interest.

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70 Investment in PT Gaung Negeri. Bonds 8,341,000 Interest Revenue 150,000 Cash 8,491,000 Oct. 1

2008 a.

Investment in PT Gaung Negeri Bonds 42,000*

Interest Revenue 42,000

Dec. 1

2008 b.

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72

Prepare a corporation

balance sheet.

Objective 6

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73

Balance Sheet of a Corporation

72

(Continued)

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Balance Sheet of a Corporation

15-6

(Concluded)

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15-6

Held-to-Maturity Securities

Investments in bonds or other debt

securities that management intends

to hold to their maturity are called

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 Such securities are classified as long-term

investments under the caption Investments.

15-6

 These investments are reported at their cost

less any amortized premium or plus any amortized discount.

 The market (fair) value of the bond

investment should be disclosed, either on the face of the balance sheet or in an

accompanying note.

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Some corporations have a high ratio of

debt to stockholders‟ equity. For such

corporations, analysts often assess the relative risk of the debtholders in terms

of the number of times the interest

charges are earned during the year.

15-6

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78 77

15-6

To illustrate, assume the following data:

Interest expense Rp 36,883,000,000 Income before income tax 174,315,000,000

Income before income tax + Interest expense Interest expense

Rp174,315,000,000 + Rp36,883,000,000 Rp36,883,000,000

Number of Times the Interest Charges Earned

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15-6

The number of times interest

charges are earned is

5.73

.

This ratio indicates that the debtholders have adequate protection against a potential drop in

earnings jeopardizing their receipt of interest payments. A full analysis should involve a