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Hi DEAR Tutor, I have a question
Company a borrowed 10 millon loan note nominal interest rate 7%.Effective interest rate 10% and useful life is 4 years.Investment income 72000.
Capitalised Interest 10000*7%=700
Amortisation of effective interest rate 10000*10%÷4=25
Investment income (72)
Overall capitalisation =653Here is question arising if we capitalise nominal interest rate on borrowing why we amortise effective intereat rate above?
Also,another question is issues cost is the same as effective interest on borrowing cost?sometimes i face question such issue cost amortised or effective interest amortised?
Could you explain it,Mr Mike?
Thank in advanceI told you in my previous post about the treatment of transaction costs!
Now, effective interest rate … if the coupon rate is 7%, what on earth makes you think that effective rate should be 2.5% (you have divided the 10% by 4 (presumably for the four year life) but that’s silly!)
$10,000 x 10% = $1,000
Interest paid $10,000 x 7% = $700
Therefore increase finance costs from $700 to $1,000 and add the $300 to the value of the loan
Dr Finance costs $700
Cr Cash $700Dr Finance costs $300
Cr Loan $300OK?
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