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Ambush loaned $ 200k to bromwich on 1 dec 20×3. The effective and stated interest rate for this loan was 8%, Interest is payable by bromwich at the end of each year and the loan is repayable on 30 Nov x7. At 30 nov 20×5, the directors of ambush have heard that bromwich is in financial difficulties and is undergoing financial regorganisation. The directors feel that it is likely that they will only receive $ 100k on nov 30×7 and no future interest payment. Interest for the year ended 30 nov 20×5 had been received. The financial year end of ambush is 30 nov 20×5.
Explan the accounting treatment under ias 39 of the loan to bromwich in the f/s of ambush at 30 nov 20×5
The answer of acca is $200k- $85730 = 114720 which is the impairment loss recognised immediately in p/l
* 100k x 1/(1.08^2)My question is why did they use the initial $200k to calculate the impairment loss>?
Since the loan was taken on 01.01×3 shoudlnt we add interest up to 30 nov 20×5 then use this figure to calculate the impairment charge?this is how i did it- 30 Nov x4 (200000 x 1.08) 216000 becomes the CV of the financial asset and recognise 16000 as finance income in p/l
-30 nov x5 (216000 x 1.08) 233280 becomes the CV and recognise 17280 as finance incoem in p/lThen we use the 233280 to calculate the impairment loss which will be 233280 – 85730 =147550.
Why would you debit the financial asset (from 200k to 216k and then to 233,280) If the interest has been paid, surely you would debit cash and credit loan interest income!
so if i understood what you said sir , my workings would have been correct if it wasnt specified that interest has been paid?
or my accounting treatment for financial asset specifically for this question is entirely incorrect?If the interest had NOT been paid, then the value of the financial asset would, in an exam question, have given you the face value as at date of redemption. You would then have been able to calculate the PRESENT VALUE of the asset and therefore also the value of the equity within a mixed / compound instrument. Then, as each year goes by and interest is paid, typically at a discounted rate when compared with the effective rate, the value of the asset would increase by the amount of the difference between effective and actual interest until, at redemption date, the asset would equal (subject to rounding) the value given in a question.
Does that help?
ok i think i got it!! so we use effective interest method for both financial assets and liabilites. thankk you sir
Sir why is 200,000 taken as carrying amount at 30.11.X5? i understood the entries u have mentioned in your previous post. is that 200,000 stays same after two years
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