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- April 20, 2017 at 10:10 am #382810
Recap
I have another question that i am getting confused with.
Lucindy issue a debt instrument on 1 Jan X4 at its nominal value of $4,000,000. The instrument carries a fixed coupon interest rate of 6%, which is payable annually in arrears.
Transaction costs associated with the issue were $200,000. The effective interest rate applicable to this instrument has been calculated at approximately 8.4%.What are the amounts that should be recorded as the opening liability on 1 Jan X4 and the finance cost in the P & L for year ended 31 Dec X4?
Here i have a feeling i have worked it out the wrong way round.
Opening liability = 4,000,000 – 200,000 = 3,800,000
Finance Cost = 3,800,000 * 8.4% = 319,200
I think i answered correctly if Lucindy has invested rather than being the issuer.So would the opening Liability be the 4,000,000 (and ignore the transaction costs for the liability)
Finance cost = (4,000,000* 6%) = 240April 20, 2017 at 7:24 am
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MikeLittleKeymaster
No, I believe that your answer is correctOK?
Sorry I didn’t understand your reply. Are you saying i was correct with my answer;
1) Opening liability = 4,000,000 – 200,000 = 3,800,000
Finance Cost = 3,800,000 * 8.4% = 319,2002) Opening Liability be the 4,000,000 (and ignore the transaction costs for the liability)
Finance cost = (4,000,000* 6%) = 240I cannot find how to record if when a company issues Debt instrument, unless I am not understanding the question fully?
April 20, 2017 at 10:45 am #382812This part of your previous post was what I was referring to when I said that I believed that it was correct:
“Opening liability = 4,000,000 – 200,000 = 3,800,000
Finance Cost = 3,800,000 * 8.4% = 319,200”
Double entry for recording a debt instrument:
Dr Cash 4,000,000
Cr Liability 4,000,000Dr Liability 200,000
Cr Cash 200,000Paying interest at 6%
Dr Finance charges 240,000
Cr Cash 240,000Accounting for effective interest
Dr Finance charges 79,200 ((3,800,000 @8.4%) – 240,000))
Cr Liability 79,200Better?
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