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Finance cost of loans is the effective interest rate only or coupon rate also?
Ive noticed in some questions the coupon rate is also taken along with effective rate and treated as accrual.
Im fully confused!The finance cost is the effective rate as applied to the loan amount brought forward from the previous year
The coupon rate shows us how much interest has actually been paid in the accounting period.
In terms of accruals, it could well be that only half a year’s interest as actually been paid so we need to accrue a further half year’s interest
When we now compare the full year’s interest (paid and accrued (if necessary)) with the effective rate, we typically will arrive at a difference
this difference will be the subject of this journal entry:
Dr Finance charges
Cr Loanso, you see, this difference will not be shown within any figure for accruals
Better?
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