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August 28, 2020 at 10:58 pm
Hi Chris, Can you please explain why the 4% coupon interest of £40,000 per year is deducted from the b/f value, also why it gets credited to investments and not debited?
July 18, 2020 at 1:43 pm
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 🙂
November 21, 2019 at 9:57 am
Don`t you think that it could be easier just simply calculate PV of all the cash payments at effective int rate?
July 2, 2020 at 1:31 pm
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.
June 3, 2019 at 10:58 am
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?
June 3, 2019 at 8:45 pm
Where exactly is the question in the study text?
April 18, 2019 at 8:38 am
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
April 18, 2019 at 9:20 am
sorry, chris. I overlooked your further explanation on JE.
Got it and as below.
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
January 9, 2019 at 10:12 am
shouldnt the investment be 980000 in year 1 in the SFP?
July 2, 2020 at 1:07 pm
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.
November 22, 2018 at 1:29 pm
Excellent lecture as usual, however, I thought we record the £200,000 incentive 2% in the following journals
DR Investment £1,000,000
Cr Bank £980,000
Cr Discount £200,000
is it possible to confirm it? thanks
December 31, 2018 at 2:50 pm
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.
October 11, 2018 at 9:02 am
Could it be because it is effective interest so we are discounting?
October 11, 2018 at 8:38 am
How like to know why 1.05 and not 0.05 on redemption.
November 22, 2018 at 1:26 pm
Because it is an incentive, You will have an extra 5% on redemption and hence 1.05 not 0.05.
June 30, 2018 at 11:01 am
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.
June 29, 2018 at 6:08 pm
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.
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