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There is an exam question that reads:
On 1 Jan 2010, a company purchased a certificate of deposit issued by a bank at $2,264,000 in the market. The CD carries interest at 4.25% p.a. and is due to be redeemed by the bank at the nominal amount of $2,500,000 on 31 December 2013. Interest is payable annually on 31 December. The company intends to hold it up to redemption date, the effective yield on the investment is 6%.The answer is that as at 31/12/2010, the CD is measured at amortised cost as follows:
{ 2,264,000 x (1+6%) ) – 2,500,000 x 4.25%
= 2,293,590I cannot follow the logic of how to work out the amortised cost of FA. Could anyone kindly tell me the logic behind the calculation and what then is the amortised cost of the Financial asset at the next balance sheet dated 31/12/2011?
Thank you.
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first u can take the 2264000*6 % effective interest,get 135840,all is debit bal,and minus the credit bal(2500*4.25%)legal interest,so the c/d value is 2293590,the reason behind is we want to made our FS comparable to other
company,all use the effective interest,In this case,is 6 % (effective interest).in the 2nd year u will take 2293590*6% again and minus legal interest 2500*4.25%so the bal c/d is 2324955
But this is my solution,I also need to hear tutor answer^^- Topics: 1
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Dear tutor,
I aslo in doubt in measurement of finincial liability,is the treament same with the financial asset?once decided using amortise cost we must USE ORIGINAL EFFECTIVE INTEREST right?I find the answer in BPP 2012 in QS Ashanti(june 2010) amended by bpp(bcos answer by examiner use revise int rate,that tme IFRS9 hvnt come out) and last round Dec 2011,the examiner answer use the original effective rate(QS1 W4)this is acceptable by IFRS9 take effect,but when I do the qs Aron(june 09)the bpp ans use the revise interest rate 9.38%,is bpp made the mistake or the liabilities still not taken effect for new standard?I seem to remember that BPP had a substantial number of corrections to their Revision Kit in that year, but my understanding is that we should continue to apply the original interest rate
And your above explanation was fine with the amortised cost …… but you said you would do it in a T account style.
Your answer bears no similarity to what I understand to be a T account!
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sorry if I made u confuse,u can ignore wht I posted++,I edit already,thank you for solve my doubt
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@mikelittle said:
OKDear tutor,
I see the qs again and again I realised the qs stated bcos of the issue cost the effective interest from 9 to 9.38,so when we use amortise we should change the effective interest to 9.38?bcos the interest is not change during the year,it change at the first day,thus,the examiner answer is still correct?
can u help me to see the qs again?I afraid I misunderstanding the qs 2 (b)1
https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/p2int_2009_jun_q.pdf
and any new article available for p2?thank you very much!I think it’s normally safe to say that the examiner’s answer is correct. The ACCA do not find these people from the general public. The examiners are ( with occasional lapses ) generally fair and always well able to answer their own questions.
Trust the examiner’s answer
I remember this one – that effective interest changed from 9% to 9.38% to take into account a selling cost which needed to be apportioned between equity and liability on a convertible bond. If you work through the answer, qqloo, using the 9.38% effective interest rate (after using the adjusted liability opening balance) you will see that it does work out neatly. NB Small differences are rounding
Good luck Tuesday
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