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Financial instruments – Example (amortised cost) – ACCA Financial Reporting (FR)

VIVA

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    • Redemption is at 5% [5% of 100= 5], apart from the nominal value [10,000 * 100] we are gaining an interest of 5% on redemption [10,000 * 105] which totals to 1,050,000. In the video, sir has calculated the interest as 105/100 = 1.05

      • redeemable at a premium to me means “at an extra of”

        so all in all you will get back the full amount and an additional 5% more

        full amount = 100×10,000= 1,000,000.00
        add 5% = 5/100 x 1,000,000.00= 50,000.00
        Total = 1,050,000.00

  3. Hi Chris,

    I have watched your lecture a couple of times and there is a lot of confusion with regards to principles of amortization…and shall appreciate your support to understand below matters
    1) Technically Interest receivable is Current Asset (SFP) and Interest received is Income (SPL). So shouldnt we be crediting interest income with 40000, and increase investment only by differential amount between Interest receivable and Interest received on yearly basis
    2) If continuing with point 1 above, than the accumulated interest receivable (after each year difference between interest received and interest receivable) shall be debited only at the end of 4th year when full and final payments are received..

    I shall deeply value your support in making me understand this important concept. A detailed journal entry and any recommended additional videos or notes shall be highly appreciated.

    • I think i got it, so hear me out. Before reading this i hope you are clear with the cost of debenture calculation (980,000) and the cash flows through out the year calculation (40k + 40k + 40k + 40k + 1050k). Now what i want you to know is that coupon rate is a fixed interest rate on investment that we the debenture holder receive annually, and effective rate of interest is calculated by the business on the total interest receivable (coupon), capital gains, and premium on redemption. After calculating the total amount, they convert it to a percentage in order to spread it over the years ( in this case 4yrs). Now after having a clear foundation on theory, we move onto the calculation of the value of investment.

      First up the cost (980,000 duh?) then we calculate the effective rate of interest (980,000*5.73%=56,154 [interest receivable]) – 56,154 includes the 40,000 and premium. We add them both to get the total value of investment. The cash receipts of $40,000 from the coupon interest are used to reduce the value of the investment. This reduction in the value of the investment reflects the cash received as income from the debentures. The calculation goes like this 980,000 + 56,154 – 40,000= 996,154. So, the statement of financial position would show the remaining value of the investment after accounting for the cash received from coupon interest, which helps provide an accurate representation of the asset’s value at a specific point in time. This process goes on and at the end, the effective rate of interest nullifies with the cashflows received.

      This took a while to understand, hope this clears some doubts. All the best!

    • PV for each payment would be different for each year. And to calculate PV it’s needed to calculate PV for each individual payment. Therefore PV of final payment would be required to calculate 3 times (for Y1, Y2 and Y3 – PV of final payment would be different), and for other payments as well. PV would be less time consuming if there was only one payment and the redemption date, but we have annual coupon receipt. Also we still need to know the interest receivable amount to charge to our PL, and calculating PV will not give us interest receivable amount itself, it will still require further calculations with deduction of B/f balance and CashFlow to get Interest. So at the very end, you just compare time required for calculating the PV for each year OR just doing B/f * EIR. I think second option is way faster.

      So instead of calculating PV of each payment for each year it’s way more convenient to just do B/f + Interest at EIR – CashFlow, it would give almost the same result.
      The pleasure of using EIR is exactly to avoid calculating PV everytime.

  10. Hi Chris, thanks so much for the lecture. While studying with BPPstudy txt, the premium rate of 5% was applied to the total cash to be received at the end of the term, in this case5% on 1,210,000 making annual int. To be received equal to 60500…..please help clarify?

  11. HI Chris,
    Thanks, can you please confirm below will be the summary of the entry.
    In your video you are showing the last leg as credit interest receivable but P&L. In short, this should go to income , correct. thanks for confirming my understanding.

    Dr Investment 980,000
    Cr Bank 980,000

    Dr Bank 1,210,000
    Cr Investment 980,000
    Cr P&L Interest income 230,000

    Thanks
    Vijay Menon

    • sorry, chris. I overlooked your further explanation on JE.
      Got it and as below.

      Initial cash
      dr Invest (SFP) 980,000
      cr Bank 980,000

      each year to pass – Total to pass as below
      dr Invest (SFP) 230,000
      cr Intrest received (SPL) 230,000

      each year to pass- Total to pass as below
      dr Bank 160,000
      cr Invest (SFP) 160,000

      Final cash Received
      dr Bank 1,050,000
      cr Invest (SFP) 1,050,000

    • It was 980,000 at the start of Year 1, but as you know, SFP shows the snapshot at Year-End. From the start of the year till the end, the followings events took place:

      A) We accrued for interest receivable as below:
      980,000*5.73% = 56,154

      B) We received a 4% coupon in the 1st year. (DR Cash, CR Investment)
      (40,000)

      And all together, it looks like this at the end of Year 1.
      980,000 + 56154 – 40,000 = $996,154

  13. Hi

    Excellent lecture as usual, however, I thought we record the 拢200,000 incentive 2% in the following journals

    DR Investment 拢1,000,000
    Cr Bank 拢980,000
    Cr Discount 拢200,000

    is it possible to confirm it? thanks

    • Hi,

      The 2% you are referring to is the coupon rate of interest, which is what must be legally paid each year on the debenture. The payment of 2% is applied to the par value of the debenture and so $200,000 is paid each year. The adjustment will CR Bank and DR Financial liability.

      Thanks

  16. Hi,

    It’s hotel/motel with regards to the interest received/receivable, i.e. the same thing wbut with a slightly different name.

    Remember that we are accounting for the substance of the transaction, so even though legally the cash received is interest in substance it is just a repayment of the cash advanced and the interest accrued on the debt is based upon the effective rate. To account for the cash received we will therefor DR Bank CR Financial asset.

    Thanks

    • Hi Chris, so you’re saying that Interest Receivable is actually an SPL Income account?

      I think other commenters are confused in the same way that I was initially, thinking that “receivable” indicated an asset account, with the receivable interest being all recognized upfront and then the journal entry moving the amount between two asset accounts each year.

      This now makes a lot more sense.

  17. I would like to know why the interest received 230,000 spread over 4 years will be credited to interest RECEIVABLE rather than interest RECEIVED? Is it because we haven’t receive ths interest yet? We will receive it only when we redempt the investment in debt? Is that so?

    How about the coupon interest 4% for each year which are 40,000 per year. Why it will directly go to reduce the investment rather than go through to interest received section?
    Can u let me know about this.
    Thanks Sir

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