CHAPTER 4

NON-CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Include:
 Redeemable Preference Shares

 Corporate Bonds

 Long Term Loans

 Leases
REDEEMABLE PREFERENCE
SHARES
MFRS 132:
 Redeemable preference shares shall be presented
as liability separately from shareholders’ equity.
 Any dividends attributable to the Redeemable
Preference Shares shall be presented as an
expense in the Statement of Profit or Loss.
REDEMPTION OF
PREFERENCE SHARES
 Other than ordinary shares, companies may also
issue preference shares to public.
 The issuance of preference shares is stated in
Section 61 of Companies Act 1965.
 Companies may issue redeemable preference
shares if it is authorised by its articles, which at the
option of the company, are liable to be redeemed
 Redemption shall take place according to what is
stipulated in the articles.
REDEMPTION OF
PREFERENCE SHARES
The following statutory provisions must be achieved:
 Fully paid-up shares

 Redeemed using one the following methods:

 Out of proceeds of a fresh issue of shares made for the
purpose of redemption.
 Out of profits (retained profit)
 If the redemption is made out of profits, a capital
redemption reserve must be created of a sum equal to
the nominal amount of the shares redeemed.
 The capital redemption reserve can only be used for
the purpose of issuing bonus shares to members.
 Any premium payable on redemption shall be made out
of profits or share premium account.
AMORTISATION SCHEDULE
 The amortisation schedule is prepared to show the
amortised cost carrying amount of the redeemable
preference shares at the end of each financial year
and the related dividend expense in each year.

Year Beginning Dividend Dividend paid Redeemable Preference Ending amount

amount expense at Shares accretion
Effective
interest (Ei)

a b = Ei x a c d=b-c e=a+d
1
2
3
4
5
EXAMPLE
Prime Bhd is registered with an authorised capital of 50,000,000 ordinary shares of
RM1.00 each and 20,000,000 7% preference shares of RM1.00 each. Below is the
extract Statement of Financial Position of Prime Bhd as at 1 January 2003:
RM
Issued and paid up capital
20,000,000 ordinary shares of RM1 each 20,000,000
10,000,000 7% redeemable preference shares of RM1 each 10,000,000

Reserves
Share premium 1,000,000
Retained profits 12,000,000
The preference shares were issued on 1 January 2003 at par value of RM1 and will
be redeemed on 31 December 2007 at a premium of RM0.20 per share.
The preference dividend were paid on 31 December each year.
A fresh issue of 5,000,000 ordinary shares was made for the purpose of the
redemption at RM1.10. The new shares were fully subscribed and paid for by the end
of the year.
The effective interest rate is10.26%.

Required:
Prepare the amortisation schedule.
AMORTISATION SCHEDULE
 The amortisation schedule below shows the
amortised cost carrying amount of the redeemable
preference shares at the end of each financial year
and the related dividend expense in each year.
Year Beginning Dividend Dividend paid Redeemable Preference Ending amount
amount expense at Shares accretion
10.26%

a b = Ei x a c d=b-c e= a+d
20X3 10,000,000 1,025,910 (700,000) 325,910 10,325,910
20X4 10,325,910 1,059,345 (700,000) 359,345 10,685,255
20X5 10,685,255 1,096,211 (700,000) 396,211 11,081,466
20X6 11,081,466 1,136,858 (700,000) 436,858 11,518,324
20X7 11,518,324 1,181,676 (700,000) 481,676 12,000,000
5,500,000 (3,500,000) 2,000,000

 The ending value must equal to the amount redeemed,

RM12,000,000.
ACCOUNTING FOR CORPORATE
BONDS
 What is corporate bonds?
 A corporate bond or loan stock is a long term debts
issued by a company to raise cash.
 It has a contract of bond indenture/agreement
which specifies the followings:
1) obligation to pay a sum of money at a specified

maturity date.
2) periodic interest
 Corporate bond can be issued at par, discount and
premium.
MFRS 139
 Measurement on initial recognition – Bond should
be recognised at cost, which is the fair value of the
consideration received.
 Subsequent measurement – An issuing entity
should measure all financial liabilities at the
amortised cost model.
 Gain or losses on financial liabilities not to be
remeasured to fair value.
BOND ISSUED AND REDEEMED
AT PAR
Journal entries
Year 1
 To record proceeds from issuance of bonds.

Debit Cash a/c

Credit Bond/Secured loan stock a/c

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year

Debit Bond interest expense a/c

Credit Cash a/c

Year of Redemption
 To record redemption of bond at maturity date

Debit Bond/Secured loan stock a/c

Credit Cash a/c
EXAMPLE 1
 A company issue a 10% RM10,000,000 bond at its
par value. The bond matures in five years. The
market interest rate is 10%.
 The net present value of the bond is computed as
follows:
BV = interest + redemption sum
BV =PVIFA(10%,5)1,000,000 + PVIF(10%,5)10,000,000
= 3.7908 x RM1,000,000 + 0.62092 x RM10,000,000
= RM3,790,800 + RM6,209,200
= RM10,000,000
 Example : Refer to text book page 681& 682
SOLUTION
Journal entries
Year 1
 To record proceeds from issuance of bonds.

Debit Cash a/c 10,000,000

Credit Bond/Secured loan stock a/c 10,000,000

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year
Debit Bond interest expense a/c 1,000,000
Credit Cash a/c 1,000,000

Year of Redemption
 To record redemption of bond at maturity date
Debit Bond a/c 10,000,000
Credit Cash a/c 10,000,000
BOND ISSUED AT DISCOUNT
Journal entries
 To record proceeds from issuance of bonds.
Debit Cash a/c
Debit Discount on bond a/c
Credit Bond a/c/Secured Loan Stock

 To record interest expense paid on bond every year

Debit Bond interest expense a/c
Credit Cash a/c

 To amortise discount on bond

Debit Bond interest expense a/c
Credit Discount on bond a/c

 To record redemption of bond at maturity date

Debit Bond a/c/Secured Loan Stock
Credit Cash a/c
EXAMPLE 2
 A company issue a RM50,000,000 par value bond with a coupon
rate of 6%. The bond matures in five years. The market interest
rate is 10%.
 Refer Text Book Page 683 – 685

 Present Value of bond = RM42,418,426

 Discount on bond:
= RM50,000,000 – RM42,418,426
= RM7,581,574

Amortisation of discount based on straight line method

= RM7,581,574 / 5 years
= RM1,516,315

Interest paid = RM50,000,000 x 6% = 3,000,000

AMORTISATION SCHEDULE
Amortisation based on effective interest rate method:
Year Beginning Effective Coupon interest Discount amortised Ending amount
amount interest paid
at 10%

a b = 10% x a c d=b+c e=a+d

1 42,418,426 4,241,843 (3,000,000) 1,241,843 43,660,269

2 43,660,269 4,366,027 (3,000,000) 1,366,027 45,026,296

3 45,026,296 4,502,630 (3,000,000) 1,502,630 46,528,926

4 46,528,926 4,652,893 (3,000,000) 1,652,893 48,181,818

5 48,181,818 4,818,182 (3,000,000) 1,818,182 50,000,000

22,581,574 15,000,000 7,581,574

SOLUTION
Journal entries:
Year 1
 To record proceeds from issuance of bonds.

Debit Cash a/c RM42,418,426

Debit Discount on bond a/c RM7,581,574
Credit Bond a/c/Secured Loan Stock RM50,000,000

Year 1 – Year of redemption

 To record interest expense paid on bond every year

Debit Bond interest expense a/c RM3,000,000

Credit Cash a/c RM3,000,000

 To amortise discount on bond

Debit Bond interest expense a/c } Refer to amortisation schedule
Credit Discount on bond a/c }

Year of redemption
 To record redemption of bond at maturity date

Debit Bond a/c/Secured Loan Stock RM50,000,000

Credit Cash a/c RM50,000,000
BOND ISSUED AT PREMIUM
Journal entries
Year 1
 To record proceeds from issuance of bonds.
Debit Cash a/c
Credit Premium on bond a/c
Credit Bond a/c

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year
Debit Bond interest expense a/c
Credit Cash a/c

 To amortise premium on bond

Debit Premium on bond a/c
Credit Bond interest expense a/c

Year of Redemption
 To record redemption of bond at maturity date
Debit Bond a/c
Credit Cash a/c
EXAMPLE 3
 A company issue a RM1,000,000 par value bond
with a coupon interest of 12%. The bond matures in
five years. The market interest rate is 10%.
 Refer text book page 688 – 689

 The present value of bond = RM1,075,816

 Premium on bond = RM1,075,816 – RM1,000,000

= RM 75,816
 Interest paid = RM1,000,000 x 12% = RM120,000
AMORTISATION SCHEDULE
Year Beginning Effective Coupon interest Premium amortised Ending amount
amount interest paid
at 10%

a b = 10% x a c d=b+c e=a+d

1 1,075,816 107,582 (120,000) (12,418) 1,063,398

2 1,063,398 106,340 (120,000) (13,660) 1,049,738

3 1,049,738 104,974 (120,000) (15,026) 1,034,712

4 1,034,712 103,471 (120,000) (16,529) 1,018,83

5 1,018,83 101,817 (120,000) (18,183) 1,000,000

524,184 (600,000) (75,816)

SOLUTION
Journal entries
Year 1
 To record proceeds from issuance of bonds.

Debit Cash a/c RM1,075,816

Credit Premium on bond a/c RM75,816
Credit Bond a/c RM1,000,000

Year 1 – Year of Redemption

 To recognise interest expenses paid on bond every year

Debit Bond interest expense a/c RM120,000

Credit Cash a/c RM120,000

 To amortise premium on bond

Debit Premium on bond a/c } Refer to amortisation schedule
Credit Bond interest expense a/c }

Year of Redemption
 To record redemption of bond at maturity date

Debit Bond a/c 1,000,000

Credit Cash a/c 1,000,000
METHODS OF
AMORTISATION
 2 methods : straight line method and present value
amortisation method
 Using straight line method, it will produce a
constant amount of amortisation every year.
However, this method does not reflect the effective
rate of interest based on the outstanding carrying
amount of the bond in each year.
 If the interest expense is to reflect the effective rate
of interest, the effective interest rate
method/present value amortisation method is to be
applied.
TRANSACTIONS COSTS OF BONDS
ISSUE
 Issuance of bonds involves numerous costs such as:
 Legal and Accounting Expense;
 Administrative Expense of printing documents and prospectus;
 Underwriting fees
 The above costs can be:
1. Treated as an expense; or
2. Reduced the related bond liability for the costs incurred.

Method 1
Debit Issue of Bonds Expenses
Credit Profit or Loss

Method 2
Debit Deferred bond issue costs
Credit Bond a/c

Debit Interest expenses

Credit Deferred bond issue costs

 Refer textbook page 690 - 651

ACCOUNTING FOR BANK LOANS AND
OTHER LONG TERM DEBTS
 For bank loan, the face value is equal to its present value
because banks quote/use market rate/fair value for their
loans.

Journal entries
 To record the receipt of loan

Debit Cash a/c

Credit Bank loan a/c

 To record bank loan interest

Debit Bank loan interest expenses a/c
Credit Cash or interest payable a/c
EARLIER RETIREMENT OF DEBTS
 A long term debt such as bond or a term loan , may be
retired or extinguished earlier than its maturity date.
 To qualify for de-recognition, the
retirement/extinguishment must be a legal discharge of
financial liability.
 The earlier retirement of bond can be achieved by a
reacquisition or repurchase of the bonds in the open
market.
 The earlier retirement of loan or other long term debts is
accomplished by a payment directly to the creditor/bank
before the maturity date.
 Refer textbook page 710 – 712.