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 its redeemable at par + premium 1% +0.05% so all in all you will get back your full amount and an additional 5% more

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!

Hi Chris, Can you please explain why the 4% coupon interest of 拢40,000 per year is deducted from the b/f value, also why it gets credited to investments and not debited?

Effective rate of interest (amortised cost example) should in fact be 5,72% and not 5,73%. Otherwise magic works wonderfully, thanks for great lectures 馃檪

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.

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?

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

no, it’s 980,000 in Y0. Although the dates are not specified in the question, from the text I understand that question wants to see full 4 years after the year of purchase.

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

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.

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.

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.

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

Bishesh2060 says

Why was the interest receivable credited?

amgalanbaatar0127 says

Initial recognition:

Dt: Investment 980,000

Kt: Bank 980,000

At the end of the year

Dt: Investment 56,154

Kt: Interest income 56,154

Dt: Bank 40,000

Kt: Investment 40,000

vanshitaramani says

why did we take 1.05 instead of .05

Sam6365 says

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

Shanoya says

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

so its redeemable at par + premium

1% +0.05%

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

Shanoya says

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

khorasiaasif@gmail.com says

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.

Talkativejerk says

I had the same doubt did you clarify it kindly help?

Sam6365 says

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!

sakshi24 says

1.05 came multiplied while redeeming

sakshi24 says

I got it

sakshi24 says

how did 1.05 came multiplied while redeeming

emuszynski says

Why the interest in the table is called interest receivable? This is interest received (SPL), I guess?

tanya18 says

Hi Chris, Can you please explain why the 4% coupon interest of 拢40,000 per year is deducted from the b/f value, also why it gets credited to investments and not debited?

Knott says

Hi Chris,

Effective rate of interest (amortised cost example) should in fact be 5,72% and not 5,73%. Otherwise magic works wonderfully, thanks for great lectures 馃檪

mashikh says

It’s actually 5.72042540067849%, if we want to get exact $230,000 over 4 years, but it will be impractical to use it so they rounded up.

abdulrahimanes says

can you please tell me how’d you get that figure, I’ve been trying all the methods I know and can’t seem to arrive anywhere near 5.72%

igor1989 says

Hi Chris,

Don`t you think that it could be easier just simply calculate PV of all the cash payments at effective int rate?

Regards,

Igor

mariakurina says

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.

bankimolly says

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?

P2-D2 says

Hi,

Where exactly is the question in the study text?

Thanks

vijay says

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

vijay says

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

khanumishq says

shouldnt the investment be 980000 in year 1 in the SFP?

mariakurina says

no, it’s 980,000 in Y0. Although the dates are not specified in the question, from the text I understand that question wants to see full 4 years after the year of purchase.

mashikh says

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

haider says

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

P2-D2 says

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

vmchishimba says

Could it be because it is effective interest so we are discounting?

vmchishimba says

How like to know why 1.05 and not 0.05 on redemption.

haider says

Because it is an incentive, You will have an extra 5% on redemption and hence 1.05 not 0.05.

P2-D2 says

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

tules says

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.

xiiaolih says

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