Kindly help. We have invested in government bonds. How is the treatment for bond investiments and coupon receipts in manager. And what kind of investiments does the tab “Investiments” apply to. Is it stocks only?
You can record your initial investment as an Investment if you like, then, you can create Recurring Receipts for your coupon payments.
Ok but I have an issue with the overall interest component. The bond is for 15 years and as it were the central bank owes not only the principal amount but also the interest component. So when i just record the innitial amount as an investment am not sure against what amount the coupon payment are supposed be receipted. I hope I am making sense.
Bond interest is paid out as annual coupons, for that you can do this:
The principal goes in an Asset account on the Balance sheet accounts side.
The interest goes in a profit account in the Profit and loss accounts side.
Thanks for the reply,
Well in my head am seeing both the principal and the interest on the asset side. That is one line for the principal and another for the interest. Now, this is taking into considertion that we have an annual interest rate 23.5% for the next 15 years. Wouldnt it be good practice to show on the balance sheet the actual liability owing by the central bank from inception which includes the interest component?.
I also believe somehow that the interest on the asset side should be reducing by every coupon payment and at the same time increasing the profit in the P&L, thereby completing the duoble entry.
In a domestic home loan the repayments to the bank typically include an interest and repayment of principle which would be entered into manager using two line items in the Manager payment. So similar but I didn’t think that’s what is happening with bonds.
In Government bonds you buy the bond investment, the payment for which is recorded as an entry in an investment Asset in a Balance sheet account. It’s value will fluctuate with time which you may record as an unrealised gain/loss. It’s book value does not directly include the life time interest interest you may receive. You can sell the investment asset, the profit/loss (residual after covering the purchase cost) is recorded in a Profit and loss account as income(loss).
The bond investment should make a regular profit (interest paid by your Government), which is recorded in Manager as a business income in profit and loss side of Manager, the same as interest from a bank account or dividend from shares.
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Is it also necesary to do
When I use the investment tab as instructedd, am i not suposed to have it as an asset on the Asset side and not as an investtiment gain / lose
It seems that you are asking this question because you have not fully grasped accounting for bonds (financial instrument, accounting for assets or liabilities with contractual cash flows). While you may be able to construct a bond amortization schedule, you might be struggling with how to translate this into entries within an accounting system.
To address this, you first need to identify the relevant accounts to be created in the Chart of Accounts and then determine the appropriate journal entries into these accounts for financial reporting purposes for every reporting period.
These concepts are best explained through examples and illustrations.
Kindly provide the house with an illustration and let us see how the discussion will help you find answers.
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It is not accurate to state that the interest on a bond is solely determined by the coupon rate. Under IFRS, interest receivable on a bond is considered an asset (the corresponding entry is a credit entry in the income statement) and forms part of the bond’s carrying amount, net of cash received. If an illustration is provided, this concept will become clearer.
The coupon rate merely represents the contractual cash flows (i.e., the periodic cash payments made to the bondholder). However, the actual interest recognized in accounting is based on the effective interest rate, which reflects the financial instrument’s intrinsic yield. The effective interest rate incorporates various factors, including the bond’s issue price, transaction costs, and other considerations, to determine the bond’s fair value at initial recognition and subsequent measurement.
This distinction is important because, under IFRS and other accounting standards the world over, the effective interest method is used to allocate interest income or expense over the life of the bond. This method ensures that the bond’s amortized cost reflects its fair value, rather than relying solely on the contractual cash flows indicated by the coupon rate.
Thus, the coupon rate serves as an indicator of expected cash flows but does not represent the financial instrument’s true interest or fair value. A detailed illustration can further clarify this concept. I’m waiting for @Mule1 to provide one.
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Thanks for the elaboration, I deleted my post as you are correct.
@Abeiku I was not sure what you meant by detailed illustration so I thought I could share the details above. However, explaination in your later post kind of answers what I was asking. The issue is that the Tab Investiments does not seem to be suitable for a Bond related transaction from what I understand.
Personally I use the tab but enter both unrealised gains/losses as well a realised gains/losses manually via journal entries as I have come to the same conclusion.
I will provide you a bond schedule and journal entries and statement of financial position later. I just can’t do that at my current location.
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Ok thanks, that will be so helpfull
@Mule1 I’ve used an example where you purchased 500,000 kwacha. The assumption is that there are no transaction costs, such as fees, brokerage, or other expenses, which could affect the fair value of the loan compared to its face value. In this case, the coupon rate will be equal to the effective interest rate, and the amortization schedule will be shown as follows:
Journals
Bond Investment
This is a basic example, make sure you;
Dr: Bond Investment Account 500,000 Kwatcha
Cr: Cash for payment to invest in Government Bond 500,000 Kwatcha
Interest/Coupon Payments
At the end of every 6 months (the bond coupon is paid semi-annually):
Dr: Cash (or Bond interest receivable where coupon payment may be delayed) 41,250 Kwatcha
Cr: Bond interest Income account. 41,250Kwatcha
At the end of the investment period when the capital is returned;
Debit Cash: 500,000
Credit: Bond Investment Account: 500,000
Always look at the bond document and establish the cashflows
Example 2
Bond Face Value and investment of 500,000
Transaction and brokerage cost paid 1500
All other things are the same.
Journals
Investment
Dr: Bond Investment Account 500,000 (Investment)
Cr: Cash 500,000
Dr: Bond Investment Account 1500 (Transaction cost paid)
Cr: Cash 1,500
Interest ( Period 1)
Dr: Bond Investment Account 41,237.29 interest income on bond period 1
Cr: Bond Interest income Account 41,237.29 Interest income on bond period 1
Coupon received
Dr: Cash 41,250
Cr: Bond Investment Account 41,250 leaving a balance of 501,487.29 at the end of period 1. This balance will continue to change.
To calculate the bond effective interest rate, just create the amortization table and apply formulas to get your balances correct. After that, use the Goal Seek option in Excel under the What if - Analysis tab to determine the effective interest rate. Just ask it to set the ending balance (the cell) to zero by changing the value in the effective interest cell.
Creating a bond amortization schedule (or any financial asset with specified cashflows) is straightforward. Simply input the cash flows outlined in the bond contract along with the bond’s fair value, and let Excel calculate the effective interest rate to amortize the bond.
For the bond requirement stating that the government can call back the bond after a certain period, I can suggest how to address that scenario, if you request.
You can send me your email via inbox if you want the Excel Sheet.
And I almost forgot, the Withholding tax component is a different thing and should not appear in the bond schedule, I can give you an example of how to treat it if you want.