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Hallo,
In the example I’m solving, we have a 10% debentures (repayable year 20) at the amount of 200.
We enter in the I/S interest paid of 20 = 10% * 200
But, I see in the solution that we also have in the SOFP, Current liabilities 20 = 10% *200, what does this mean, that we haven’t paid the 20 yet, even though we have it in the I/S, so this is like a payable, or accrual, is it always like that?
Thank you!
Yes – if the interest has not been paid by the year end, then an accrual is needed.
Hallo,
Interestingly, how should I understand if the interest has been paid or not, as the example says only 10% debentures (repayable year 20)?
Nevertheless, assuming the debenture will be repaid in 20 years, I have to appropriate 10% every year, for 20 years, interest of 20 in the I/S and 20 in the current liabilities in the SOFP? This is how it should be done, do I understand correctly?
Thank you!
Hallo again,
Actually, in the solution the example says the following:
“On the assumption that the debentures have been in issue throughout the year, it is necessary to provide for a full year’s interest, and to show a liability for that interest on the statement of fi nancial position.”
– so, if the debentures haven’t been issued throughout the year, but let’s say:
1. At the end of the year
or
2. At the beginnig of the year– would that matter for having the interest as a liability or not, and in which case 1 or 2, or in both 1 and 2?
Thank you!
A debenture is simply a loan, and so if they have borrowed 200 at 10% interest they have to pay $20 interest a year.
As I wrote before, the interest is an expense in the Statement of profit or loss. If it has not been paid at the end of the year then they need an accrual in the Statement of financial position. (In the exam it would have to be made clear whether or not the interest had been paid at the end of the year).
Your book is wrong to say it would be a provision – it would be an accrual (a provision is what we call it when we are not certain of the amount but here we are certain of the amount).If they have been owing the money for the full year, then it is a full 20 interest. If the money was only borrowed half way through the year then the interest would only be half of 20. If the money was borrowed at the very end of the year then there would be no interest this year.
Hallo,
Is it possible to have the debentures in the I/S and at the same time to have the same amount under Current liabilities? Whlch would mean we haven’t paid the interest in this year.
And actually, we can’t use the word accrual for debentures, if not paid in this year, the interest will be simply listed under Current liabitilies, is this correct?
Thank you!
Debentures themselves never appear on the Statement of profit or loss. They are a non-current liability and appear on the Statement of financial interest.
The interest on the debentures appears as an expense in the Statement of profit or loss. As with all expenses, in the Statement of profit or loss we show the full expense for the year. If any of the interest for the year has not yet been paid then it is an accrual and appears as a current liability in the Statement of financial position.
hi i need help with this question
in the trial balance 10% debentures $100 000
debenture interest $5000additional info- accrued expenses: debenture interest for half a year
so my question is how to calculate debenture interest
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