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When a qs says that the market and effective interest rate was 5%,does it mean that in the calculation of the yr end balance we will take 5% as the effective interest rate and no amount for interest paid?
(Q complexity 12/09)Surely, if the borrowing was at a rate of interest where the market rate and effective rate are the same, we should calculate interest and add it to the face value of the loan. If any of the 5% interest has been paid, then that would be deducted from the grossed up value. In your example, 5% of $X when added to $X will give us a value one year after borrowing of $1.05X. Deduct from that the interest actually paid and that will give us the amortised cost value. Is there any mention of any interest payment in the question? If not, if there is no interest until the end of the loan period, the double entry in the financial statements will be to Dr Finance Charges with .05X and Cr the loan account
Ok?
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