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Accounting For Financial Liabilities (FRS 139)
Accounting For Financial Liabilities (FRS 139)
LIABILITIES
(FRS 139)
Lecture 2
ACCOUNTING FOR FINANANCIAL LIALITIES
(FRS 139)
• Learning Objectives:
After this lecture you should be able:
Apply the effective interest methods of bond
discount and premium amortisation
Describe the accounting for the extinguishment
of debts
Understand the classification of discount and
premium
Understand the process of retirement of bonds
at maturity
Understand the accounting treatment of cost of
issuing bonds
Financial Accounting & Reporting 3
BKAF3063 2
ACCOUNTING FOR FINANCIAL LIABILITIES
(FRS 139)
4) If a premium exists
Interest ExpenseXX
Premium on Bonds Payable XX
Interest Payable XX
5) If a discount exists
Interest ExpenseXX
Discount on Bonds Payable XX
Interest Payable XX
Financial Accounting & 7
BKAF3063
Reporting 3
ACCOUNTING FOR FINANCIAL LIABILITIES
(FRS 139)
• Amortisation: Straight-line Method
1/1/07 92,278
a)
RM4,000 = RM100,000 X 8% X 6/12 c) RM744 = RM4,000 - RM3,256
b)
RM3,256 = RM108,530 X 6% X 6/12 d) RM107,786 = RM108,530 - RM744
Financial Accounting & 15
BKAF3063
Reporting 3
Classification of Discount and Premium
• Unamortized premiums and discounts are
reported with the Bonds Payable account in
the liability section of the balance sheet.
• Premiums and discounts are not liability
accounts; they are merely liability valuation
accounts.
• Premiums are added to the Bonds Payable
account and discounts are deducted from the
Bonds Payable account in the liability section
of the balance sheet.
BKAF3063
Financial Accounting &
Reporting 3
16
Classification
Classification of
of Discount
Discount and
and Premium
Premium
BKAF3063 19
Financial Accounting & Reporting 3
Cost of Bond Issue
• Assume that Cyber Bhd issued a
RM40,000,000 five-year bond at its par value
on 1 January 1999. The bond carries a coupon
interest of 10% and interest is payable on 31
Dec each year. Costs of issuing the bond,
which included underwriting fees, totaled
RM1,000,000. The costs were capitalized as a
deferred charge and amortized on the straight
line method. Show the entries to
(a) record the issue of bond on 1 Jan 1999
(b) recognize the amortization of the bond
issue cost and interest expense
Solution
a) Journal entry to record the issuance of the bond
Dt Cash 39,000,000
Dt Deferred chargers bond 1,000,000
Kt Bonds Payable 40,000,000
b) Journal entry to recognize amortization of deferred charge
Dt Amortization expense 200,000
Kt Deferred charges bond 200,000
c) Journal entry to recognize interest expense
Dt Interest expense 4,000,000
Kt Cash 4,000,000
Extinguishment
Extinguishment of
of Debt
Debt
Extinguishment before Maturity Date
Reacquisition price > Net carrying amount = Loss
Net carrying amount > Reacquisition price = Gain
At time of reacquisition, unamortized premium or
discount, and any costs of issue applicable to the
bonds, must be amortized up to the reacquisition
date.
BKAF3063 22
Financial Accounting & Reporting 3
Extinguishment
Extinguishment of
of Debt
Debt
Illustration Three year 8% bonds of RM100,000 issued on
Jan. 1, 2007, are recalled at 105 on Dec. 31, 2008. Expenses
of recall are RM2,000. Market interest on issue date was
10%.
8% 10%
Cash Interest Discount Carrying
Date Paid Expense Amortized Amount
1/1/07 RM95,027
12/31/07 RM8,000 RM9,503 RM1,503 96,530
12/31/08 8,000 9,653 1,653 98,183
BKAF3063 24
Financial Accounting & Reporting 3
END LECTURE 2
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