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Chapter 8

Sources of Capital:
Debt

McGraw-Hill/Irwin Copyright © 2011. The McGraw-Hill Companies. All Rights Reserved.


Liability

• Obligation to an outside party.


• Arises from a transaction or an event
that has already happened.
• Some not legally enforceable:
– E.g., Allowance for Warranties.

8-2
Legal Obligations That Are
Not Accounting Liabilities
 Executory contracts.
 Contracts in which neither party has yet
performed.
 Contract to pay a baseball player $1 million per
year for five years.
 A contract to provide legal services next year.

8-3
Are These Liabilities?
 Receive $50,000 retainer for legal
services to be performed on an as-
needed basis next year.
 Purchase contract for future delivery of
certain goods from the seller.
 Seller of a house receives $10,000 as a
non-refundable deposit.
 $1,000,000 product liability suit against
company. Is probable will lose suit. 8-4
Contingencies

• Uncertainty as to possible gain or loss


that will ultimately be resolved by some
future event.
• Gain contingencies.
– Usually not reported (conservatism
concept).
• Loss contingencies.
– Conditions present determine if recorded.
8-5
6

Accounting
10 Treatment of Contingent Liabilities 11-5
Click to edit Master title style
Accounting
Likelihood of Treatment
Occurring
Measurement Record and
Probable Estimable Disclose
Liability
Contingency Not Disclose
Estimable Liability
Disclose
Possible
Liability

6
No action70
Remote
required
Loss Contingency

• Record if:
– Probable an asset impaired or liability
incurred.
– Can be reasonably estimated.
• Disclose if:
– Only reasonably possible, and/or,
– Cannot be reasonably estimated.
• No disclosure if possibility is remote.
8-7
Sources of funds

 Debt capital (this chapter).


 Obtained from borrowing (i.e., creditors).
 Equity capital (Chapter 9).
 Obtained from shareholders.
 Direct contribution (paid-in capital).
 Indirect contribution (retained earnings).

8-8
Debt Capital
• Debt instruments.
• Term loans.
• Repayable according to a specified schedule.
• For major corporations, bonds more prevalent.
• Bonds.
• Certificate promising to pay its holder:
• Specified sum of money at a stated date, and
• Interest at a stated rate until maturity.
• Price usually quoted as % of face value (e.g., 98, 102).

8-9
10

Bond
BondsIndenture
Payable
10 15-2
11-5
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 A corporation that issues bonds enters into a
contract or agreement (called a bond indenture or
trust indenture) with the bondholders.

 Usually, it contain about the face value of each


bond, (called the principal, is Rp1,000,000 or a
multiple of Rp1,000,000.) and its maturity date.
 Stated Interest on bonds (may be payable
annually, semiannually, or. Most pay interest
semiannually. Quarterly)
 May also contain covenants (e.g., maintaining
certain minimum financial ratios).
10
Bonds
• Variable rate bond.
• Interest rate varies, usually with prime
rate.
• Mortgage bond.
• Secured by pledged assets.
• Debenture bond.
• Not secured by specific assets.

8-11
Bonds
• Sinking fund bonds.
• Covenant that requires setting aside cash/investments
to be used to redeem bonds at maturity (or at regular
intervals).
• Serial bonds.
• Redeemed in installments (redemption date specified
on bond).
• Term bonds.
• When all bonds of an issue mature at the same time,
• Callable bonds.
• Option of issuing entity to redeem before maturity.

8-12
Bonds
 Zero coupon bonds.
 Issued at deep discount.
 No interest is paid.
 Convertible bonds.
 Bondholder has the right to exchange bond for
specified number of common shares.
 Subordinated.
 Claims are inferior to claims of general or
secured creditors, but take precedence over
claims of shareholders.
8-13
Bond Terminology
• Par value.
• Also called face value, principal value, maturity
value.
• Coupon rate.
• Stated interest rate.
• Interest payments.
• Face value * Stated interest rate.
• Market rate.
• Prevailing interest rate for a given financial
instrument.
8-14
Bond Terminology
• Bond issuance costs.
• E.g., investment banking, accounting, legal,
printing.
• Recorded as a deferred charge.
• Amortized to expense over life of bond.
• Bond discount.
• Occurs when market rate is higher than coupon rate.
• Bond premium.
• Occurs when market rate is lower than coupon rate.
8-15
Bond Terminology

• Net book value.


• Principal, less unamortized discount (or plus
unamortized premium).
• Net carrying amount.
• Book value less unamortized deferred charges
(issuance costs).

8-16
17

Pricing
PricingPayable
Bonds of
of
10Bond
BondsPayable
Payable 15-2
11-5
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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.
17
18

Pricing
PricingPayable
Bonds of
of
10Bond
BondsPayable
Payable 15-2
11-5
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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.

18
19

Pricing
PricingPayable
Bonds of
of
10Bond
BondsPayable
Payable 15-2
11-5
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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. 19
17
20

Pricing
PricingPayable
Bonds of
of
10Bond
BondsPayable
Payable 15-2
11-5
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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. 20
18
21

Pricing
PricingPayable
Bonds of
of
10Bond
BondsPayable
Payable 15-2
11-5
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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. 21
19
Bond Issue Price
• Two components:
1. Present value of principal.
2. Present value of interest payments.
• Present value calculations are based
on market rate of interest.
• The difference between the issue price
and the par value is the amount of
discount or premium.
8-22
Accounts Used For Bonds
 Bonds Payable.
 Liability, par (maturity) value of bonds.
 Bond Discount.
 Contra-liability account (i.e., subtract from
Bonds Payable on Balance Sheet).
 Bond Premium.
 Adjunct-liability account (i.e., add to Bonds
Payable on balance sheet).
8-23
24

Time
TimeValue
Pricing
Bonds Value
Payable
of
10Bonds
of
ofMoney
Money
Payable 15-2
11-5
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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.

24
25

Time Value of Money


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
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Present Value of the Face Amount of Bonds

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 End of


Year 1 Year 2

Rp1,000,000 x 0.82645 25
21
Rp826,450
26

15-2
Time
TimeValue
Pricing
Bonds Value
Payable
of
10Bonds
of
ofMoney
Money
Payable 15-2
11-5
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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?

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 26


22
27

Time Value of Money


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
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Present Value of the Periodic Bond Interest Payments

Rp100,000
Rp100,000
Interest Interest
payment payment

Today End of End of


Year 1 Year 2

Rp90,910 Rp100,000 x 0.90909

Rp100,000 x
Rp82,64 0.82645
0

Present value, at 10%, of Rp100,000


Rp173,550 interest payments to be received each 27
23
year for 2 years (rounded)
28

Time Value of Money


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
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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
Total present value of bond Rp1,000,000

28
24
Present Value of 2-Year, 10% Bond
The Life of a Bond
1. IIssuance.
 Record liability (i.e., Bonds Payable)
 Record Bond Discount or Bond Premium.
 Record Deferred Charges.

8-29
The Life of a Bond
2. BBond Interest Expense entries.
• Usually semi-annual.
• Consists of:
• Cash interest payments (i.e., Face value *
Stated interest rate), and
• ADD bond discount amortization, or
• SUBTRACT bond premium amortization.
• May need adjusting entry if bond interest
payment date does not match end of period.
8-30
The Life of a Bond
3. RRetirement.
• Before maturity (i.e., callable or purchased
in market).
• Gain (loss) = Reacquisition price – Net carrying
amount.
• At maturity.
• Zero ($0) balance in Deferred Charges, Bond
Discount (or Bond Premium) because of
amortization.
• Debit Bonds Payable, credit Cash.
8-31
Bond Interest Expense:
Additional Considerations
 Effective interest method.
 Required method to compute bond interest
expense (and discount/premium amortization).
 Straight-line method allowed (if results not
materially different).
 Bond interest expense = Book value * Market
rate.
 Book value continuously changing (i.e., increasing with
discount, decreasing with premium).
 Market rate at bond issuance (i.e., remains constant).
8-32
33

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at Face Amount

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%.

33
34

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at Face Amount

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
44,160,000*
(Exhibit 4: n = 10; i = 6%)
Total present value of bonds Rp100,000,000

34
29
*Because the present value tables are rounded to five decimal
places, minor rounding differences may appear in this illustration.
35

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at Face Amount

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 100 000 000
Bonds Payable 100 000 000
Issued Rp100,000,000
bonds payable at face
amount.

35
30
36

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at Face Amount

On June 30, an interest payment of Rp6,000,000


is made (Rp100,000,000 x .12 x 6/12).

June 30 Interest Expense 6 000 000


Cash 6 000 000
Paid six months’ interest on
bonds.

36
31
37

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at Face Amount

The bond matured on December 31,


2011. At this time, the corporation paid
the face amount to the bondholder.
2011
Dec. 31 Bonds Payable 100 000 000
Cash 100 000 000
Paid bond principal at
maturity date.

37
32
38

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at a Discount

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?

38
39
39

Accounting for Bond Payable


Accounting
Time Value
Pricing
Bonds Payable
of
10 Bonds
of
forMoney
Bond
Payable
Payable 15-3
15-2
11-5
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Time Value
Pricing
Bonds Payable
of
10 Bonds
of Money
Payable
Bonds Issued at a Discount
15-3
15-2
11-5

Present value of face amount of


Rp100,000,000 due in 5 years at 13%
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
Total present value of bonds Rp96,406,000 39
34
40

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at a Discount

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 3 594 000
Bonds Payable 100 000 000
Issued Rp100,000,000
bonds at discount.

40
35
41
Accounting for Bond Payable
Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
Bonds Issued at a Discount
Click to edit Master title style
Exercise
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.

Cash 845,562,000
Discount on Bonds Payable 154,438,000
Bonds Payable 1,000,000,000
36
41
42

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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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.
Both methods amortize the same total
amount of discount over the life of the
bonds.
42
43

Accounting for Bond Payable


Amortizing
Time
Pricing
Bonds Value
Payable
of
10Bonds
of
a Bond
Money
Payable
Discount 15-3
15-2
11-5
Click to edit Master title style
Amortizing a Bond Discount
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 6 359 400
Discount on Bonds Payable 359 400
Cash 6 000 00
Paid semiannual interest and
amortized 1/10 of bond
discount.
43
38
44

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at a Premium

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.

44
45

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at a Premium
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%)

45,226,000 45
41
Total present value of bonds Rp103,769,000
46

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
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Bonds Issued at a Premium

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:
2007
Jan. 1 Cash 103 769 000
Bonds Payable 100 000 000
Premium on Bonds Payable 3 769 000
Issued Rp100,000,000
bonds at a premium.
46

42
47
Accounting for Bond Payable
Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-3
15-2
11-5
15-3
Bonds Issued at a Premium

Click to edit Master title style


Exercise

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.

Cash 2,154,435,000
Premium on Bonds Payable 154,438,000
Bonds Payable 2,000,000,000
43
47
48

Accounting for Bond Payable


Amortizing
Time
Pricing
Bonds Value
Payable
of
10Bonds
of
a Bond
Money
Payable
Premium 15-3
15-2
11-5
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Amortizing a Bond Premium
On June 30, 2007, paid the semiannual
interest and amortized the premium. The
firm uses straight-line amortization.
2007
June 30 Interest Expense 5 623 100
Premium on Bonds Payable 376 900
Cash 6 000 000
Paid semiannual interest and
Rp3,769,000 x
amortized 1/10 of bond prem. 1/10

48
44
49

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-3
Click to edit Master title style
Zero Coupon Bonds

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

49
46
50

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-3
Click to edit Master title style
Zero Coupon Bonds

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 46 727 000
Bonds Payable 100 000 000
Issued Rp100,000,000
zero-coupon bonds.

50
47
51

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-4
15-3
Click to edit Master title style
Bond Retirement

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.

51
52

Accounting for Bond Payable


Bond Value
Time
Pricing
Bonds Redemption
Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-4
15-3
Click to edit Master title style
Bond Retirement

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.
52
53

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-4
15-3
Click to edit Master title style
Bond Retirement

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.
2007
June 30 Bonds Payable 25 000 000
Premium on Bonds Payable 1 000 000
Cash 24 000 000
Gain on Redemption of Bonds 2 000 000
Retired bonds for $24,000. 53

51
54

Accounting for Bond Payable


Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-4
15-3
Click to edit Master title style
Bond Retirement

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.
54
52
55
Accounting for Bond Payable
Time Value
Pricing
Bonds Payable
of
10Bonds
of Money
Payable 15-2
11-5
15-4
15-3
Bond Retirement

Click to edit Master title style


Exercise

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
Discount on Bonds Payable 40,000,000
Cash 475,000,000

55
53
Capital Lease
 Called “finance lease” by IFRS.
 Meets certain criteria which requires it to be
recorded as a capital lease (rather than as an
operating lease).
 Treated as a purchase of an asset and
creation of a liability.
 Treated similar to an installment purchase.
 Capital lease obligation (liability) is lower of fair
value or present value of minimum lease
payments.
 Asset depreciated; interest paid on obligation.
8-56
Analysis of Capital Structure

 Invested (permanent) capital.


 Debt capital + Equity capital.
 Leverage.
 Based on the use of debt capital.
 A measure of the soundness of a company’s
financial position.
 Risk vs. cost.

8-57
Analysis of Capital Structure:
Measuring Leverage
 Debt/equity ratio.
 Debt ÷ Shareholders’ equity.
 Debt can be total liabilities or just long-term
liabilities.
 Debt/capitalization ratio.
 Debt ÷ (Debt + Shareholders’ equity).
 Times interest earned (i.e., interest coverage).
 Pre-tax income before interest expense ÷
Interest expense.
8-58
Bond Ratings

• Indicates probability of going into


default (i.e., not paying interest or
principal as due).
• Factors considered include ratio
analysis, industry analysis, company’s
market position.
• Bond rating agencies include Standard
& Poor’s, Moody’s.
8-59
Discussion Questions

• Does debt or equity capital have more


risk?
– From company point of view?
– From investor point of view?
• Why is the term “leverage” used for the
debt-to-equity ratio?

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Time Value
Pricing
Bonds
LeveragePayable
of Bonds
of Money
10Impact Payable
of Debt Instruments 15-2
11-5
15-1
15-4
15-3
Click to edit Master title style
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

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62

Leverage
Time Value
Pricing
Bonds Payable
of
10Impact
Bonds
of Money
of
Payable
Debt Instruments 15-2
11-5
15-1
15-4
15-3
Click to edit Master title style
Effect of Alternative Financing Plans—Rp800,000,000 Earnings

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7
63

Leverage
Time Value
Pricing
Bonds Payable
of
10Impact
Bonds
of Money
of
Payable
Debt Instruments 15-2
11-5
15-1
15-4
15-3
Click to edit Master title style
Effect of Alternative Financing Plans—Rp440,000,000 Earnings

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8
64

Leverage
Time Value
Pricing
Bonds Payable
of 15-1
15-2
11-5
15-1
15-4
15-3
10Impact
Bonds
of Money
of
Payable
Debt Instruments

Click to edit Master title style


Exercise

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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9
65
Leverage
Time Value
Pricing
Bonds Payable
of
10Impact
Bonds
of Money
of
Payable
Debt Instruments 15-3
15-2
11-5
15-1
15-4
15-1

Click to edit(inMaster
‘000 Rp)
title style
(in ‘000 Rp)
Plan I Plan II
Earnings before bond interest
and income tax Rp750,000 Rp750,000
Bond interest 0 (2,000,000 x 10%) 200,000
Balance Rp750,000 Rp550,000
Income tax (750,000 x 30%) 225,000 (550,000 x 30%) 165,000
Net income Rp525,000 Rp385,000
Dividend on preferred stock 0 0
Earnings available for
common stock Rp525,000 Rp385,000
Number of common shares /300,000 /100,000
Earnings per share on
common stock Rp1,750 Rp3,850
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10
For Practice: PE 15-1A, PE 15-1B
Thank You

all presentation slide in this class is taken from


1. “Accounting – text and cases” by Anthony, Hawkins and Merchant
2. Accounting ,22ed by Warren, Reeve, Duchac
Powerpoint by Douglas Cloud
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