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Good morning Mike,
This time I have a query about Financial Instruments and Amortised Costs. I understand that on the basis of accruals concept the interest we receive ie the difference between the money paid and money received is year split so that it can be shown on SPL. However, it is not the true money received e.g. If we buy 5% Bonds for $97000 with the maturity value of 1005960 after 3 years, the interest we have received is £8960 which is to be distributed. The effective rate of interest being 8%?
My questions is what is the significance of the effective rate of interest. I find it quite confusing because according to me we are getting 5000 pa and why this is not shown on SPL?
Apologise if I have not made myself clear.
Please advise.
Regards
PuneshIf the effective rate is 8% then the amount on the SPoL is 8% of $97,000 = $7,760
We only actually receive cash of $5,000 so the missing $2,760 is debited to the investment …
… but it’s important that the full credit of 8% be recognised as income
After 3 years the investment value should have increased to $100,000 and that’s the amount that will be received when the borrower redeems the loan
OK?
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