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
Email : adengpustikaningsih@uny.ac.id
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Bonds Payable
and Investments
in Bonds
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After studying this chapter, you should
be able to:
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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After studying this chapter, you should
be able to:
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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Objective 1
15-1
Compute the potential
impact of long-term
borrowing on the
earnings per share of a
corporation.
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Financing Corporations
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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
the maturity date.
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Plan 1
Plan 2
15-1
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
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Effect of Alternative
Financing Plans—
Rp800,000,000 Earnings
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15-1
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Effect of Alternative
Financing Plans—
Rp440,000,000 Earnings
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15-1
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15-1
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Example Exercise 15-1
PT Gilang., is considering the following alternative plans
for financing their company (in „000 Rp):
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
before bond interest and income tax is Rp750,000,000.
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15-1
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„000 Rp)
(in „000 Rp)
Follow My Example 15-1
Earnings before bond interest
and income tax
Bond interest
Balance
(750,000 x 30%)
Income tax
Net income
Dividend on preferred stock
Earnings available for
common stock
Number of common shares
Earnings per share on
common stock
Plan I
Plan II
Rp750,000
0
Rp750,000
225,000
Rp525,000
0
Rp750,000
(2,000,000 x 10%) 200,000
Rp550,000
(550,000 x 30%) 165,000
Rp385,000
0
Rp525,000
/300,000
Rp385,000
/100,000
Rp1,750
Rp3,850
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For Practice: PE 15-1A, PE 15-1B
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Objective 2
15-2
Describe the
characteristics,
terminology, and
pricing of bonds
payable.
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Bonds Payable
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15-2
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,
semiannually, or quarterly. Most pay
interest semiannually.
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15-2
When all bonds of an issue mature at
the same time, they are called term
bonds.
If the maturity dates are spread over
several dates, they are called serial
bonds.
Bonds that may be exchanged for other
securities are called convertible bonds.
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15-2
Bonds that a corporation reserves the
right to redeem before their maturity
are called callable bonds.
Bonds issued on the basis of the
general credit of the corporation are
debenture bonds.
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Pricing of Bonds Payable
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15-2
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.
3. The market or effective rate of interest.
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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
2. future expectations.
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MARKET RATE = CONTRACT RATE
Selling price of bond = Rp1,000,000
Rp1,000,000
10% payable
annually
If the contract rate equals the market rate of
interest, the bonds will sell at their face amount.
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15-2
MARKET RATE > CONTRACT RATE
Selling price of bond < Rp1,000,000
Rp1,000,000
10% payable
annually
–
Discount
If the market rate is higher than the contract rate,
the bonds will sell at a discount.
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15-2
MARKET < CONTRACT RATE
Selling price of bond > Rp1,000,000
Rp1,000,000
10% payable
annually
+
Premium
If the market rate is lower than the contract rate,
the bonds will sell at a premium.
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Time Value of Money
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15-2
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
received in the future.
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Present Value of the Face Amount
of Bonds
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15-2
A Rp1,000,000, 10% bond is purchased. It pays
interest annually and will mature in two years.
Rp1,000,
000
10% payable
annually
Today
End of
Year 1
Rp1,000,000 x 0.82645
Rp826,450
End of
Year 2
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15-2
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Example Exercise 15-2
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?
Follow My Example 15-2
Rp4,000,000 x .62092* = Rp2,483,680
*Present value of Rp1 for 5 periods at 10%
For Practice: PE 15-2A. PE 15-2B
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Present Value of the Periodic Bond
Interest Payments
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Rp100,000
Interest
payment
End of
Year 1
Today
Rp90,910
Rp82,64
0
Rp173,550
15-2
Rp100,000
Interest
payment
End of
Year 2
Rp100,000 x 0.90909
Rp100,000 x
0.82645
Present value, at 10%, of Rp100,000
interest payments to be received each
year for 2 years (rounded)
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Present Value of 2-Year, 10% Bond
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15-2
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%)
173,550
(Slide 23)
Total present value of bond
Rp1,000,000
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15-2
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Example Exercise 15-3
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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15-2
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Follow My Example 15-3
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%)
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
For Practice: PE 15-3A, PE 15-3B
Rp15,671,000*
4,329,000*
$20,000,000
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15-3
Objective 3
Journalize entries for
bonds payable.
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Bonds Issued at Face Amount
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15-3
On January 1, 2007, a
corporation issues for cash
Rp100,000,000 of 12%, fiveyear bonds; interest payable
semiannually. The market rate
of interest is 12%.
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15-3
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Present value of face amount of
Rp100,000,000 due in 5 years at 12%
compounded annually: Rp100,000,000 x Rp 55,840,000
0.55840 (Exhibit 3: n = 10, i = 6%)
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%)
Total present value of bonds
44,160,000*
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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15-3
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%.
2007
Jan. 1 Cash
Bonds Payable
100 000 000
100 000 000
Issued Rp100,000,000
bonds payable at face
amount.
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15-3
On June 30, an interest payment of Rp6,000,000
is made (Rp100,000,000 x .12 x 6/12).
June 30 Interest Expense
Cash
6 000 000
6 000 000
Paid six months‟ interest on
bonds.
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15-3
The bond matured on December 31,
2011. At this time, the corporation paid
the face amount to the bondholder.
2011
Dec. 31 Bonds Payable
Cash
100 000 000
100 000 000
Paid bond principal at
maturity date.
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Bonds Issued at a Discount
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15-3
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?
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15-3
Present value of face amount of
Rp100,000,000 due in 5 years at 13%
compounded semiannually: Rp100,000,000
Rp53,273,000
x 0.53273
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%)
Total present value of bonds
43,133,000
Rp96,406,000
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15-3
On January 1, 2007, the firm issued
Rp100,000,000 bonds for Rp96,406,000 (a
discount of Rp3,594,000).
2007
Jan. 1 Cash
96 406 000
Discount on Bonds Payable
Bonds Payable
3 594 000
100 000 000
Issued Rp100,000,000
bonds at discount.
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15-3
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Example Exercise 15-4
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.
Follow My Example 15-4
Cash
845,562,000
Discount on Bonds Payable 154,438,000
Bonds Payable
1,000,000,000
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For Practice: PE 15-4A, PE 15-4B
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Amortizing a Bond Discount
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15-3
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.
Both methods amortize the same total
amount of discount over the life of the
bonds.
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Amortizing a Bond Discount
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15-3
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.
2007
June 30 Interest Expense
Discount on Bonds Payable
Cash
6 359 400
359 400
6 000 00
Paid semiannual interest and
amortized 1/10 of bond
discount.
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15-3
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Example Exercise 15-5
Using the bond from Example Exercise 15-4,
journalize the first interest payment and the
amortization of the related bond discount.
Click on this button to go to Example Exercise 15-4.
To return to this slide, type “39” and press “Enter.”
Follow My Example 15-5
Interest Expense
45,443,800
Discount on Bonds Payable
15,443,800
Cash
30,000,000
Paid interest and amortized the
bond discount (Rp154,438,000 †
10).
For Practice: PE 15-5A, PE 15-5B
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Bonds Issued at a Premium
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15-3
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.
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15-3
Present value of face amount of
Rp100,000,000 due in 5 years at 11%
compounded semiannually: Rp100,000,000
x 0.58543 (Exhibit 3: n =10, i = 5½%)
Rp 58,543,000
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%)
Total present value of bonds
45,226,000 42
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Rp103,769,000
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Issued
of bonds
15-3
Rp103,769,000 (a premium of
Rp3,769,000). The entry to record this
information is as follows:
2007
Jan. 1 Cash
103 769 000
Bonds Payable
Premium on Bonds Payable
100 000 000
3 769 000
Issued Rp100,000,000
bonds at a premium.
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15-3
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Example Exercise 15-6
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.
Follow My Example 15-6
Cash
2,154,435,000
Premium on Bonds Payable
154,438,000
Bonds Payable
2,000,000,000
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For Practice: PE 15-6A, PE 15-6B
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Amortizing a Bond Premium
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15-3
On June 30, 2007, paid the semiannual
interest and amortized the premium. The
firm uses straight-line amortization.
2007
June 30 Interest Expense
Premium on Bonds Payable
Cash
Paid semiannual interest and
amortized 1/10 of bond prem.
5 623 100
376 900
6 000 000
Rp3,769,000 x
1/10
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15-3
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Example Exercise 15-7
Using the bond from Example Exercise 15-6 (Slide
43), journalize the first interest payment and the
amortization of the related bond premium.
Follow My Example 15-7
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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For Practice: PE 15-7A, PE 15-7B
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Zero-Coupon Bonds
15-3
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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.
Present value of Rp100,000,000 due in 5
years at 13% compounded semiannually:
Rp100,000,000 x 0.53273 (PV of Rp1 for
10 periods at 6½%) = Rp53,273,000
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15-3
On January 1, 2007, issue 5-year,
Rp100,000,000 zero-coupon bonds
when the market rate of interest is 13%.
2007
Jan. 1 Cash
53 273 000
Discount on Bonds Payable
Bonds Payable
46 727 000
100 000 000
Issued Rp100,000,000
zero-coupon bonds.
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15-4
Objective 4
Describe and illustrate
the payment and
redemption of bonds
payable.
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15-4
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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Bond Redemption
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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
call price is above the face value.
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On June to
30, aedit
corporation
has a title
bond issue
of
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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.
2007
June 30 Bonds Payable
Premium on Bonds Payable
Cash
Gain on Redemption of Bonds
25 000 000
1 000 000
24 000 000
2 000 000
Retired bonds for $24,000.
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15-4
Instead, assume that on June 30 the corporation
calls all of the bonds, paying Rp105,000,000.
2007
June 30 Bonds Payable
100 000 000
Premium on Bonds Payable
4 000 000
Loss on Redemption of Bonds
1 000 000
Cash
105 000 000
Redeemed Rp100,000,000
bonds for Rp105,000,000.
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15-4
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Example Exercise 15-8
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.
Follow My Example 15-8
Bonds Payable
500,000,000
Loss on Redemption of Bonds
15,000,000
Discount on Bonds Payable
40,000,000
Cash
475,000,000
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For Practice: PE 15-8A, PE 15-8B
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Objective 5
15-5
Journalize entries for
the purchase, interest,
discount, and premium
amortization, and sale
of bond investments.
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Accounting for Bond Investments
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15-5
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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15-5
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.
2007
Apr. 2 Investment in PT Ludiro Madu. Bonds
Interest Revenue
Cash
1 025 300
10 200
1 035 500
Invested in a PT Ludiro Madu
bond.
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15-5
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.
2007
Apr. 2 Investment in PT Ludiro Madu Bonds
Interest Revenue
1 025 300
10 200
Cash
1 035 500
Invested in a PT Ludiro Madu
bond.
Note that the brokerage fee is added
to the cost of the investment.
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Extended Illustration for
Cahaya
PT
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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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15-5
The entry to record the investment is as follows:
2007
July 1 Investment in PT Ditho. Bonds
Interest Revenue
Cash
Purchased investment in
41 706 000
1 000 000
42 706 000
bonds, plus accrued
interest.
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15-5
PT Cahaya received semiannual interest for April
1 to October 1 (Rp50,000,000 x 8% x 6/12).
Oct. 1 Cash
2 000 000
Interest Revenue
2 000 000
Received semiannual
interest for April 1 to
October 1.
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15-5
Adjusting entry for interest accrued from October
1 to December 31 (Rp50,000,000 x 8% x 3/12).
Dec. 31 Interest Receivable
Interest Revenue
Adjusting entry for interest
accrued from October 1 to
December 31.
1 000 000
1 000 000
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15-5
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.
31 Investment in PT Ditho Bonds
Interest Revenue
Adjusting entry for
amortization of discount for
July 1 to December 31.
474 000
474 000
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15-5
The effect of these entries on Interest Revenue is as
follows:
Interest Revenue
July 1
1,000,000
Oct. 1
2,000,000
Dec. 31 Adj.1,000,000
31 Adj. 474,000
2,474,000
Adj. Bal.
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Accounting for Bond Investments—Sale
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15-5
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)].
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15-5
It has been six months since the last
amortization entry, so amortization for this
period is recorded (6 months).
2014
June 30 Investment in PT Ditho Bonds
Interest Revenue
474 000
474 000
Amortized discount for
current year.
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15-5
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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15-5
Investment in PT Ditho Bonds
2007
July 1 41,706,000
Dec. 31
474,000
2008
Dec. 31
948,000
2009
Dec. 31
948,000
2010
Dec. 31
948,000
2011
Dec. 31
948,000
2012
Dec. 31
948,000
2013
Dec. 31
948,000
2014
June 30
474,000
48,342,000
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This investment is sold on June 30, 2014 for
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Rp47,350,000 plus accrued interest of $1,000
(Rp50,000,000 x 8% x 3/12) .
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Loss on Sale of Investments
Interest Revenue
Investment in PT Ditho Bonds
Received interest and
48 350 000
992 000
1 000 000
48 342 000
proceeds from sale of
bonds.
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15-5
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Example Exercise 15-9
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.
a. Journalize the purchase of the bonds plus
accrued interest.
b. Journalize the entry to record the amortization of
the discount on December 31.
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15-5
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Follow My Example 15-9
2008
a. Oct. 1 Investment in PT Gaung Negeri. Bonds 8,341,000
Interest Revenue
150,000
Cash
8,491,000
2008
b. Dec. 1 Investment in PT Gaung Negeri Bonds
Interest Revenue
42,000*
42,000
*[(Rp10,000,000 – Rp8,341,000)/111
months] x 3 months
For Practice: PE 15-9A, PE 15-9B
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15-6
Objective 6
Prepare a corporation
balance sheet.
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Balance Sheet of a
Corporation
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15-6
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(Continued)
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Balance Sheet of a
Corporation
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15-6
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(Concluded)
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Held-to-Maturity Securities
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15-6
Investments in bonds or other debt
securities that management intends
to hold to their maturity are called
held-to-maturity securities.
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Balance Sheet Presentation of Bond
Investments
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15-6
Such securities are classified as long-term
investments under the caption Investments.
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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Financial Analysis and Interpretation
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15-6
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.
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Number of Times the Interest Charges
Earned
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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
(Continued)
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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
comparison with industry averages.
79
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Adeng Pustikaningsih, M.Si.
Dosen Jurusan Pendidikan Akuntansi
Fakultas Ekonomi
Universitas Negeri Yogyakarta
CP: 08 222 180 1695
Email : adengpustikaningsih@uny.ac.id
1
2
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Bonds Payable
and Investments
in Bonds
2
3
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to
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After studying this chapter, you should
be able to:
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
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to
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After studying this chapter, you should
be able to:
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.
4
5
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Objective 1
15-1
Compute the potential
impact of long-term
borrowing on the
earnings per share of a
corporation.
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6
Financing Corporations
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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
the maturity date.
6
7
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Plan 1
Plan 2
15-1
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
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8
Effect of Alternative
Financing Plans—
Rp800,000,000 Earnings
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15-1
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Effect of Alternative
Financing Plans—
Rp440,000,000 Earnings
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15-1
89
10
15-1
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Example Exercise 15-1
PT Gilang., is considering the following alternative plans
for financing their company (in „000 Rp):
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
before bond interest and income tax is Rp750,000,000.
10
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11
15-1
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„000 Rp)
(in „000 Rp)
Follow My Example 15-1
Earnings before bond interest
and income tax
Bond interest
Balance
(750,000 x 30%)
Income tax
Net income
Dividend on preferred stock
Earnings available for
common stock
Number of common shares
Earnings per share on
common stock
Plan I
Plan II
Rp750,000
0
Rp750,000
225,000
Rp525,000
0
Rp750,000
(2,000,000 x 10%) 200,000
Rp550,000
(550,000 x 30%) 165,000
Rp385,000
0
Rp525,000
/300,000
Rp385,000
/100,000
Rp1,750
Rp3,850
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For Practice: PE 15-1A, PE 15-1B
12
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Objective 2
15-2
Describe the
characteristics,
terminology, and
pricing of bonds
payable.
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13
Bonds Payable
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15-2
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,
semiannually, or quarterly. Most pay
interest semiannually.
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14
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15-2
When all bonds of an issue mature at
the same time, they are called term
bonds.
If the maturity dates are spread over
several dates, they are called serial
bonds.
Bonds that may be exchanged for other
securities are called convertible bonds.
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15-2
Bonds that a corporation reserves the
right to redeem before their maturity
are called callable bonds.
Bonds issued on the basis of the
general credit of the corporation are
debenture bonds.
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Pricing of Bonds Payable
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15-2
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.
3. The market or effective rate of interest.
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17
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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
2. future expectations.
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15-2
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MARKET RATE = CONTRACT RATE
Selling price of bond = Rp1,000,000
Rp1,000,000
10% payable
annually
If the contract rate equals the market rate of
interest, the bonds will sell at their face amount.
18
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19
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15-2
MARKET RATE > CONTRACT RATE
Selling price of bond < Rp1,000,000
Rp1,000,000
10% payable
annually
–
Discount
If the market rate is higher than the contract rate,
the bonds will sell at a discount.
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20
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15-2
MARKET < CONTRACT RATE
Selling price of bond > Rp1,000,000
Rp1,000,000
10% payable
annually
+
Premium
If the market rate is lower than the contract rate,
the bonds will sell at a premium.
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Time Value of Money
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15-2
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
received in the future.
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Present Value of the Face Amount
of Bonds
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15-2
A Rp1,000,000, 10% bond is purchased. It pays
interest annually and will mature in two years.
Rp1,000,
000
10% payable
annually
Today
End of
Year 1
Rp1,000,000 x 0.82645
Rp826,450
End of
Year 2
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23
15-2
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Example Exercise 15-2
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?
Follow My Example 15-2
Rp4,000,000 x .62092* = Rp2,483,680
*Present value of Rp1 for 5 periods at 10%
For Practice: PE 15-2A. PE 15-2B
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Present Value of the Periodic Bond
Interest Payments
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Rp100,000
Interest
payment
End of
Year 1
Today
Rp90,910
Rp82,64
0
Rp173,550
15-2
Rp100,000
Interest
payment
End of
Year 2
Rp100,000 x 0.90909
Rp100,000 x
0.82645
Present value, at 10%, of Rp100,000
interest payments to be received each
year for 2 years (rounded)
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Present Value of 2-Year, 10% Bond
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15-2
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%)
173,550
(Slide 23)
Total present value of bond
Rp1,000,000
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15-2
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Example Exercise 15-3
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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15-2
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Follow My Example 15-3
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%)
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
For Practice: PE 15-3A, PE 15-3B
Rp15,671,000*
4,329,000*
$20,000,000
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28
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15-3
Objective 3
Journalize entries for
bonds payable.
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Bonds Issued at Face Amount
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15-3
On January 1, 2007, a
corporation issues for cash
Rp100,000,000 of 12%, fiveyear bonds; interest payable
semiannually. The market rate
of interest is 12%.
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15-3
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Present value of face amount of
Rp100,000,000 due in 5 years at 12%
compounded annually: Rp100,000,000 x Rp 55,840,000
0.55840 (Exhibit 3: n = 10, i = 6%)
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%)
Total present value of bonds
44,160,000*
Rp100,000,000
*Because the present value tables are rounded to five decimal
places, minor rounding differences may appear in this illustration.
30
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31
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15-3
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%.
2007
Jan. 1 Cash
Bonds Payable
100 000 000
100 000 000
Issued Rp100,000,000
bonds payable at face
amount.
31
30
32
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15-3
On June 30, an interest payment of Rp6,000,000
is made (Rp100,000,000 x .12 x 6/12).
June 30 Interest Expense
Cash
6 000 000
6 000 000
Paid six months‟ interest on
bonds.
32
31
33
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15-3
The bond matured on December 31,
2011. At this time, the corporation paid
the face amount to the bondholder.
2011
Dec. 31 Bonds Payable
Cash
100 000 000
100 000 000
Paid bond principal at
maturity date.
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34
Bonds Issued at a Discount
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15-3
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?
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35
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15-3
Present value of face amount of
Rp100,000,000 due in 5 years at 13%
compounded semiannually: Rp100,000,000
Rp53,273,000
x 0.53273
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%)
Total present value of bonds
43,133,000
Rp96,406,000
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36
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15-3
On January 1, 2007, the firm issued
Rp100,000,000 bonds for Rp96,406,000 (a
discount of Rp3,594,000).
2007
Jan. 1 Cash
96 406 000
Discount on Bonds Payable
Bonds Payable
3 594 000
100 000 000
Issued Rp100,000,000
bonds at discount.
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15-3
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Example Exercise 15-4
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.
Follow My Example 15-4
Cash
845,562,000
Discount on Bonds Payable 154,438,000
Bonds Payable
1,000,000,000
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37
For Practice: PE 15-4A, PE 15-4B
38
Amortizing a Bond Discount
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15-3
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.
Both methods amortize the same total
amount of discount over the life of the
bonds.
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39
Amortizing a Bond Discount
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15-3
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.
2007
June 30 Interest Expense
Discount on Bonds Payable
Cash
6 359 400
359 400
6 000 00
Paid semiannual interest and
amortized 1/10 of bond
discount.
39
38
40
15-3
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Example Exercise 15-5
Using the bond from Example Exercise 15-4,
journalize the first interest payment and the
amortization of the related bond discount.
Click on this button to go to Example Exercise 15-4.
To return to this slide, type “39” and press “Enter.”
Follow My Example 15-5
Interest Expense
45,443,800
Discount on Bonds Payable
15,443,800
Cash
30,000,000
Paid interest and amortized the
bond discount (Rp154,438,000 †
10).
For Practice: PE 15-5A, PE 15-5B
39
40
41
Bonds Issued at a Premium
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15-3
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.
41
42
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15-3
Present value of face amount of
Rp100,000,000 due in 5 years at 11%
compounded semiannually: Rp100,000,000
x 0.58543 (Exhibit 3: n =10, i = 5½%)
Rp 58,543,000
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%)
Total present value of bonds
45,226,000 42
41
Rp103,769,000
43
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to Rp100,000,000
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titleforstyle
Issued
of bonds
15-3
Rp103,769,000 (a premium of
Rp3,769,000). The entry to record this
information is as follows:
2007
Jan. 1 Cash
103 769 000
Bonds Payable
Premium on Bonds Payable
100 000 000
3 769 000
Issued Rp100,000,000
bonds at a premium.
43
42
44
15-3
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Example Exercise 15-6
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.
Follow My Example 15-6
Cash
2,154,435,000
Premium on Bonds Payable
154,438,000
Bonds Payable
2,000,000,000
43
44
For Practice: PE 15-6A, PE 15-6B
45
Amortizing a Bond Premium
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15-3
On June 30, 2007, paid the semiannual
interest and amortized the premium. The
firm uses straight-line amortization.
2007
June 30 Interest Expense
Premium on Bonds Payable
Cash
Paid semiannual interest and
amortized 1/10 of bond prem.
5 623 100
376 900
6 000 000
Rp3,769,000 x
1/10
45
44
46
15-3
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Example Exercise 15-7
Using the bond from Example Exercise 15-6 (Slide
43), journalize the first interest payment and the
amortization of the related bond premium.
Follow My Example 15-7
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).
45
46
For Practice: PE 15-7A, PE 15-7B
47
Zero-Coupon Bonds
15-3
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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.
Present value of Rp100,000,000 due in 5
years at 13% compounded semiannually:
Rp100,000,000 x 0.53273 (PV of Rp1 for
10 periods at 6½%) = Rp53,273,000
47
46
48
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15-3
On January 1, 2007, issue 5-year,
Rp100,000,000 zero-coupon bonds
when the market rate of interest is 13%.
2007
Jan. 1 Cash
53 273 000
Discount on Bonds Payable
Bonds Payable
46 727 000
100 000 000
Issued Rp100,000,000
zero-coupon bonds.
48
47
49
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15-4
Objective 4
Describe and illustrate
the payment and
redemption of bonds
payable.
49
50
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15-4
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
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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
call price is above the face value.
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52
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Master
style
On June to
30, aedit
corporation
has a title
bond issue
of
15-4
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.
2007
June 30 Bonds Payable
Premium on Bonds Payable
Cash
Gain on Redemption of Bonds
25 000 000
1 000 000
24 000 000
2 000 000
Retired bonds for $24,000.
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53
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15-4
Instead, assume that on June 30 the corporation
calls all of the bonds, paying Rp105,000,000.
2007
June 30 Bonds Payable
100 000 000
Premium on Bonds Payable
4 000 000
Loss on Redemption of Bonds
1 000 000
Cash
105 000 000
Redeemed Rp100,000,000
bonds for Rp105,000,000.
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15-4
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Example Exercise 15-8
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.
Follow My Example 15-8
Bonds Payable
500,000,000
Loss on Redemption of Bonds
15,000,000
Discount on Bonds Payable
40,000,000
Cash
475,000,000
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53
For Practice: PE 15-8A, PE 15-8B
55
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Objective 5
15-5
Journalize entries for
the purchase, interest,
discount, and premium
amortization, and sale
of bond investments.
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56
Accounting for Bond Investments
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15-5
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
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15-5
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.
2007
Apr. 2 Investment in PT Ludiro Madu. Bonds
Interest Revenue
Cash
1 025 300
10 200
1 035 500
Invested in a PT Ludiro Madu
bond.
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58
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15-5
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.
2007
Apr. 2 Investment in PT Ludiro Madu Bonds
Interest Revenue
1 025 300
10 200
Cash
1 035 500
Invested in a PT Ludiro Madu
bond.
Note that the brokerage fee is added
to the cost of the investment.
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Extended Illustration for
Cahaya
PT
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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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15-5
The entry to record the investment is as follows:
2007
July 1 Investment in PT Ditho. Bonds
Interest Revenue
Cash
Purchased investment in
41 706 000
1 000 000
42 706 000
bonds, plus accrued
interest.
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15-5
PT Cahaya received semiannual interest for April
1 to October 1 (Rp50,000,000 x 8% x 6/12).
Oct. 1 Cash
2 000 000
Interest Revenue
2 000 000
Received semiannual
interest for April 1 to
October 1.
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15-5
Adjusting entry for interest accrued from October
1 to December 31 (Rp50,000,000 x 8% x 3/12).
Dec. 31 Interest Receivable
Interest Revenue
Adjusting entry for interest
accrued from October 1 to
December 31.
1 000 000
1 000 000
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63
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15-5
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.
31 Investment in PT Ditho Bonds
Interest Revenue
Adjusting entry for
amortization of discount for
July 1 to December 31.
474 000
474 000
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64
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15-5
The effect of these entries on Interest Revenue is as
follows:
Interest Revenue
July 1
1,000,000
Oct. 1
2,000,000
Dec. 31 Adj.1,000,000
31 Adj. 474,000
2,474,000
Adj. Bal.
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Accounting for Bond Investments—Sale
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15-5
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)].
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15-5
It has been six months since the last
amortization entry, so amortization for this
period is recorded (6 months).
2014
June 30 Investment in PT Ditho Bonds
Interest Revenue
474 000
474 000
Amortized discount for
current year.
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15-5
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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15-5
Investment in PT Ditho Bonds
2007
July 1 41,706,000
Dec. 31
474,000
2008
Dec. 31
948,000
2009
Dec. 31
948,000
2010
Dec. 31
948,000
2011
Dec. 31
948,000
2012
Dec. 31
948,000
2013
Dec. 31
948,000
2014
June 30
474,000
48,342,000
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This investment is sold on June 30, 2014 for
15-5
Rp47,350,000 plus accrued interest of $1,000
(Rp50,000,000 x 8% x 3/12) .
30 Cash
Loss on Sale of Investments
Interest Revenue
Investment in PT Ditho Bonds
Received interest and
48 350 000
992 000
1 000 000
48 342 000
proceeds from sale of
bonds.
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Example Exercise 15-9
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.
a. Journalize the purchase of the bonds plus
accrued interest.
b. Journalize the entry to record the amortization of
the discount on December 31.
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Follow My Example 15-9
2008
a. Oct. 1 Investment in PT Gaung Negeri. Bonds 8,341,000
Interest Revenue
150,000
Cash
8,491,000
2008
b. Dec. 1 Investment in PT Gaung Negeri Bonds
Interest Revenue
42,000*
42,000
*[(Rp10,000,000 – Rp8,341,000)/111
months] x 3 months
For Practice: PE 15-9A, PE 15-9B
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15-6
Objective 6
Prepare a corporation
balance sheet.
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Balance Sheet of a
Corporation
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15-6
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(Continued)
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Balance Sheet of a
Corporation
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15-6
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(Concluded)
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Held-to-Maturity Securities
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15-6
Investments in bonds or other debt
securities that management intends
to hold to their maturity are called
held-to-maturity securities.
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Balance Sheet Presentation of Bond
Investments
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15-6
Such securities are classified as long-term
investments under the caption Investments.
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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Financial Analysis and Interpretation
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15-6
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.
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Number of Times the Interest Charges
Earned
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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
(Continued)
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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
comparison with industry averages.
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