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?

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 🙂

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.

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

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 £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 🙂

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.

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 £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

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

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