Bonds Payable

Bonds payable are long-term liabilities. a bond is a negotiable instrument, which is a promise to pay a certain amount on a certain date in the future in addition to the interest on the face value of the bond paid on the basis of a specific rate on specific dates and when companies issue bonds, this is considered a loan on the company, unlike the share, is considered a share capital and bonds to be paid on their specified maturity date upon issuance, but the shares are not refunded to the shareholders and the interest of the bonds is accrued regardless of whether the company  can gain or loss, but the shareholder gets dividends if the company has earned and decided to pay dividends, shares may not be issued at less than their face value, but in the case of bonds it is permissible to issue bonds at less than their face value, and shareholders have the right to attend the general meeting and vote at decisions, but the bondholders do not have the right to that, when the company is liquidated, the bondholder gets his share before the shareholders, and the shareholders do not get his share in the liquidation, only after paying all the liabilities

Why some of joint-stock companies prefer to issue bonds instead of issue shares?

Avoid new shareholders participating in the company's management, unlike shares and issuing bonds does not entail the shareholders’ participation in excess profits

Companies do not issue bonds unless they expect a return on investment of the borrowed money greater than the interest on the bonds that they will pay

The interest of bonds is an expense that is deducted in the income statement and deducted from the tax base, unlike dividends that are not considered cost elements. The higher the tax rates, the more necessary to use bonds instead of stocks when they need additional capital and financing by issuing additional shares instead of issuing bonds if it will lead to an increase in profits, but it will lead to a low profitability per share due to the doubling of the number of traded shares. Therefore, financing is preferred by expanding the issuance of bonds, which leads to a higher share of profitability and an increase in its price on the stock exchange. Joint-stock companies issue bonds to obtain large amounts as long-term loans

Bond Sinking Fund

Some bond issuance contracts require that the issuing company be a special fund to meet the amounts needed to pay on the maturity date and it is called a sinking fund

Types of Bonds 

Registered Bonds: are bonds that are issued in the owner’s (bond holder’s) name and address and their ownership is transferred only after waive them in writing and with the consent of the company.

Bearer Bonds: are bonds that are not registered to any owner, and their ownership is transferred from one person to another.

Bonds whose value is repaid in cash on the maturity date

Convertible Bonds: are bonds that are issued by corporations and that can be converted to shares of the issuing company’s stock according to certain conditions.

Callable Bonds: are bonds can be called away by the issuer before the maturity date, and the company pays the bondholders more than the par value.

Debenture Bonds: are bonds that are not secured by the by company assets that issues them, meaning there is no other than the general guarantee on the company's assets.

Bonds returned at one time on the maturity date & Serial Bonds 

Fixed income and variable-rate: consist of two parts, the first part is a fixed percentage and the second part is variable depending on the profits the company achieves

Bond Issuance

Bonds are issued at the same price, bond discount or bonds premium, and the issue price of a bond depends on the bonds interest rate issued by the company compared to the interest rate prevailing in the market, and on the basis of which the company determines if it will offer the bond at less than its face value and accordingly there will be a bond discount that the bond issuers will incur and is added to the bond interest value (financing costs)

But if the company issues the bond higher than its face value, there will be a bond premium and deducted from the value of the bond interest (financing costs) that the company pays in order to finally know the value of the real interest that the company pays at the end of the loan period

Bonds issued at face value 

When the company issues bonds at the face value of the bond because the market interest rate is equal to the company's interest rate

Subscribers to the bonds of the issuing company pay the value of the bonds either one-time or in installments according to the contract

If the contract stipulates a one-time payment

Account	Debit	Credit
Bank	XXX
Bond Payable		XXX

But if in installments, an adjusting journal entry is created for each subscription

Account	Debit	Credit
Installment Bonds	XXX
Bond Payable		XXX

Upon payment

Account	Debit	Credit
Bank	XXX
Installment Bonds		XXX

Bonds Issued at a Discount

When the company issues bonds less than its face value because the interest rate on issued bonds is lower than the market interest rate

A company issued 100,000 bonds, the face value of the bond is 1,000 pounds, with an interest rate of 8% at the issue rate of 800 and the market interest rate of 10%, and the bonds are returned at the end of the bond contract after five years

The face value of the bond = 100000 x 1000 = 100000000

Discount value = (1000-800) x 100000 = 2000000

The journal entry is as follows: 

Account	Debit	Credit
Bank	8000,000
Discount on Bonds Payable	2000000
Bonds Payable		10,000,000

Bonds issued at a discount is due to the interest rate on the company's bonds is lower than the market interest rate, and in order to calculate the real interest that the company incurs, the issue discount value is added to the interest and the annual amortizing bond discount is calculated

The journal entry is as follows: 

Account	Debit	Credit
Interest Expense	XXX
Discount on Bonds Payable		XXX

Bonds Issued at a Premium

When the company issues bonds above their face value that is because the interest rate of the company's bonds is higher than the market interest rate, so there is a premium bond

A company issued 1,000 bonds, the face value of the bond is 1,000 pounds, with an interest rate of 8% at the issue rate of 1200 and the market interest rate of 6%, and the bonds are returned at the end of the bond contract after five years

The face value of the bond = 100000 x 1000 = 100000000

Premium Bond= (1000-800) x 100,000 = 2000000

The journal entry is as follows: 

Account	Debit	Credit
Bank	12000000
Premium on Bonds Payable		2,000,000
Bonds Payable		10,000,000

Bonds issued at a premium that the company collected was due to the interest rate of the company's bonds is higher than the market, meaning that the company will pay high interest compared to the market interest and thus in order to calculate the real interest incurred by the company, the bonds issued at a premium is deducted from the value of the bond interest and the journal entry is as follows: 

Account	Debit	Credit
Premium on Bonds Payable	XXX
Interest Expense		XXX

Investing in Bonds 

Bonds are considered securities such as stocks that individuals or companies to invest in them by purchasing them from companies that issue these bonds and the purchased investments are considered investments mostly held to maturity and are classified as long-term investments within non-current assets except for what will be recovered during the following fiscal period, which is classified under short-term investments, and the primary objective of these investments is to achieve a current return through the interest that is accrued on these bonds during the period of their acquisition

Accounting for Investment in Bonds 

How to Buy Bonds

Purchasing bonds with a par value

Purchasing Premium Bonds

Purchasing of discount bonds

It includes the total cost of acquisition

Purchasing bonds at par value

The face value of the bond is the value stated on the bond that is redeemed on the maturity date

If the face interest equals the market interest, the bonds are purchased at their face value

In this case, the present value of the sums obtained by the investor equals with (at a discount rate is the market interest rate, which equals the face interest) the face value of the bonds, and the investor receives interest during the loan period

The accounting treatment of investments is as follows:

For example, Al-Yasmeen Company paid EGP 200,000 face value to buy bonds with an interest of 12% on July 1, 2003, the accrual bonds at the end of June 2013, and interest is paid twice on June 30 and December 31

When buying

Account	Debit	Credit
Interest Income	200,000
Cash		200,000

Interest Earned

Assuming that the purchase was made at the face value, i.e. without a discount bond or bond premium, and in this case, the investment income in each period is measured by the interest collected in cash or due at the end of each year

Interest = every six months until the maturity date, and the interest is calculated on the face value of the bond

= 200,000 × 12% (6/ 12) = 12,000

The accounting treatment is as follows:

Account	Debit	Credit
Cash	12,000
Interest Income		12,000

When the amount is refunded at the maturity date at the end of July 2013

The accounting treatment

Account	Debit	Credit
Cash	200,000
Interest Income		200,000

Assuming that the investments were sold before the maturity, the difference between the book value and the realizable value is posted to the value of income as the profit or loss, if the realizable value is greater, is considered as revenue, and vice versa if the realizable value is less, is considered as loss

Second, when buying bonds less than their face value

For example, a company issues 1000 bonds with a face value of 1000 pounds per bond with an annual interest of 10% for ten years, and the average interest rate prevailing in the market was 11%, due to the lower interest rate than the market price, the company issued the bonds at 850 and the interest is paid at the end of December 31

First, when the investee company issues bonds less than their face value is 150 pounds per bond, this is considered discount bonds for the investee company and a premium bond for the investor

The books of the investor

When buying bonds

Account	Debit	Credit
Investment in Bonds (1000×  1000)	1,000,000
Cash		8500000
Premium on Bonds Payable		150000

Interest is calculated at the face value of the bond, not the value of the bond paid

Interest 

= 850000 x 10% = 85000 pounds

The journal entry is as follows:

Account	Debit	Credit
Cash	85000
Interest Income		85000

Bond Premium Amortization 

Value of Bond Premium = 150 x 10,000 = 150,000

The bond loan agreement period is ten years and the annual value of bond premium is 15,000 pounds

The bond premium for the investor is considered as an interest added to the value of the investment income, and for the investee company it is deducted from to the value of the finance costs on the bonds payable

The accounting treatment is as follows:

Account	Debit	Credit
Premium on Bonds Payable	15,000
Interest Income		15,000

Every year until the end of the 10 years, the value of the bond premium is fully amortized

The interest income from investments held to maturity is included in the income statement for the period

Third, when buying bonds above their face value

For example, a company issues 1000 bonds with a face value of 1000 pounds per bond with an annual interest of 15% for ten years, and the average interest rate prevailing in the market was 12%, due to the lower interest rate than the market price, the company offered the bonds at 1150 and the interest is paid at the end of December 31

First, when the investee company issues bonds higher than their face value is 150 pounds per bond, this is considered premium bonds for the investee company and a discount for the investor

The books of the investor

When buying bonds

Account	Debit	Credit
Investment in Bonds (1000×  1000)	1,000,000
Discount on Bonds Payable	150000
Cash		1150000

Interest is calculated at the face value of the bond, not the value of the bond paid

Interest earned

= 1,000,000 x 10% = 100,000 pounds

The journal entry is as follows:

Account	Debit	Credit
Cash	100,000
Interest Income		100,000

Amortizing Bond Discount

Issue discount value = 150000

The bond loan agreement period is ten years and the annual issue discount value is 15,000 pounds

The issue discount for the investor is considered as an expense or loss deducted from the value of the investment income and for the investee company, it is added to the value of the finance costs on the bonds payable

The accounting treatment is as follows:

Account	Debit	Credit
Interest Income	15,000
Discount on Bonds Payable		15,000

Every year until the end of the 10 years, the issue discount value is fully amortized

The interest income from investments held to maturity is included in the income statement for the period

Long-term Commercial Paper

The company may borrow from financial institutions, insurance companies, and banks, rather than issuing additional capital shares or issuing bonds to the subscribers, which is a contract called a commercial paper or note payable that is either a bill of exchange or a promissory note. 

Long-Term Notes Payable

Long-term notes payable are essentially the same as bonds, both of which are the same

A fixed maturity date and an implicit interest rate, but the notes payable cannot be traded on the stock exchanges as in the bonds, and large joint-stock companies issue bonds and long-term notes payable to obtain the right financing, while the non-stock corporations and small-scale joint-stock companies issue long-term notes payable to obtain the right financing.

Notes Issued at Face Value: and here the note has an interest rate.

Notes Not Issued at Face Value: and here they have a zero-interest-bearing note, the implicit interest rate, and the notes payable are cash only.